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|------------------------------------------------------------------------------------------ | 
|UNITED STATES
 SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549                   
|                                                                                          
|                                                                                          
|                                                                                          
|FORM 10-Q                                                                                 
|                                                                                           | 
|                                                                                          
|                                                                                           | 
|þ QUARTERLY
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                           | 
|For the Quarterly Period Ended September
 30, 2010                                        
|                                                                                           | 
|Commission File Number: 0-20050                                                           
|                                                                                          
|                                                                                          
|                                                                                          
|PRINCETON NATIONAL BANCORP, INC.                                                          
|(Exact name of Registrant as specified in
 its charter.)                                  

|                                                                |                                        
|--------------------------------------------------------------- | ---------------------------------------
|Delaware                                                        | 36-3210283                             
|(State or other jurisdiction of
 incorporation or organization) | (I.R.S. Employer Identification Number)
|                                                                |                                        
|606 S. Main St.
 Princeton, Illinois                            | 61356                                  
|(Address of principal executive offices)                        | (Zip code)                             

|                                                                   
|-------------------------------------------------------------------
|(815) 875-4444(Registrants
 telephone number, including area code)
|                                                                   
|                                                                   

Indicate
by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes þ
No o

Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes o No o

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):

|                           |                      |                          |                             
|-------------------------- | -------------------- | ------------------------ | ----------------------------
|Large
 accelerated filer o | Accelerated
 filer o | Non-accelerated
 filer o | Smaller
 reporting company þ

Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ

Indicate
the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date.

|                        |                                 
|----------------------- | --------------------------------
|Class                   | Outstanding
 at October 19, 2010
|Common, par value $5.00 | 3,315,397                       

---

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Part
I: FINANCIAL INFORMATION

The
unaudited consolidated financial statements of Princeton National Bancorp, Inc.
and Subsidiary and managements discussion and analysis of financial condition
and results of operation are presented in the schedules as follows:

|            |                                                                                       
|----------- | --------------------------------------------------------------------------------------
|Schedule 1: | Consolidated
 Balance Sheets                                                          
|Schedule 2: | Consolidated
 Statements of Income                                                    
|Schedule 3: | Consolidated
 Statements of Stockholders Equity                                      
|Schedule 4: | Consolidated
 Statements of Cash Flows                                                
|Schedule 5: | Notes to
 Consolidated Financial Statements                                           
|Schedule 6: | Managements
 Discussion and Analysis of Financial Condition and Results of Operations
|Schedule 7: | Controls and
 Procedures                                                              

Part
II: OTHER INFORMATION

Item
1A.     Risk Factors

Smaller
reporting companies are not required to provide the information required by
this item.

Item
2.       Unregistered Sales of Equity
Securities and Use of Proceeds

(a)  None.

Item
4.     Reserved.

Item
6.     Exhibits

| |      |                                                                                                                                                                              
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 | Certification
 of Chief Executive Officer required by Rule 13a-14(a).                                                                                                        
| | 31.2 | Certification
 of Chief Financial Officer required by Rule 13a-14(a).                                                                                                        
| | 32.1 | Certification
 of Chief Executive Officer and Chief Financial Officer required by Rule
 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
 Section 1350.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

PRINCETON NATIONAL BANCORP, INC.

|   |                                     |  |    |                           
|-- | ----------------------------------- |  | -- | --------------------------
|   |                                     |  |    |                           
|By | /s/ Thomas D. Ogaard                |  | By | /s/ Todd D. Fanning       
|   |                                     |  |    |                           
|   | Thomas D. Ogaard                    |  |    | Todd D. Fanning           
|   | President & Chief Executive Officer |  |    | Executive Vice President &
|   | November 5,
 2010                   |  |    | Chief Financial Officer   
|   |                                     |  |    | November 5,
 2010         

2

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Schedule 1

|                                            
|--------------------------------------------
|Princeton National Bancorp, Inc.            
|Consolidated Balance Sheets                 
|(dollars in thousands except per share data)

|                                                                                                                                              |  |                                 |           |                   |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | --------- | ----------------- | - | --------- | -
|                                                                                                                                              |  | September
 30,2010
 (unaudited) |           | December
 31,2009 |  
|ASSETS                                                                                                                                        |  |                                 |           |                   |   |           |  
|Cash and due from banks                                                                                                                       |  | $                               | 18,485    |                   | $ | 15,546    |  
|Interest-bearing deposits
 with financial institutions                                                                                        |  |                                 | 42,789    |                   |   | 55,527    |  
|Total cash and cash equivalents                                                                                                               |  |                                 | 61,274    |                   |   | 71,073    |  
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|Loans held-for-sale, at
 lower of cost or market                                                                                              |  |                                 | 1,088     |                   |   | 3,296     |  
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|Investment securities:                                                                                                                        |  |                                 |           |                   |   |           |  
|Available-for-sale, at fair value                                                                                                             |  |                                 | 229,336   |                   |   | 288,474   |  
|Held-to-maturity, at amortized cost (fair value of $15,629 and
 $13,331)                                                                      |  |                                 | 15,075    |                   |   | 12,793    |  
|Total investment securities                                                                                                                   |  |                                 | 244,411   |                   |   | 301,267   |  
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|Loans:                                                                                                                                        |  |                                 |           |                   |   |           |  
|Loans, net of unearned interest                                                                                                               |  |                                 | 727,774   |                   |   | 798,074   |  
|Allowance for loan losses                                                                                                                     |  |                                 | (18,553   | )                 |   | (12,075   | )
|Net loans                                                                                                                                     |  |                                 | 709,221   |                   |   | 785,999   |  
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|Premises and equipment,
 net of accumulated depreciation                                                                                      |  |                                 | 27,109    |                   |   | 28,269    |  
|Land held for sale, at
 lower of cost or market                                                                                               |  |                                 | 2,244     |                   |   | 2,354     |  
|Federal Reserve and
 Federal Home Loan Bank stock                                                                                             |  |                                 | 4,498     |                   |   | 4,230     |  
|Bank-owned life insurance                                                                                                                     |  |                                 | 23,189    |                   |   | 22,540    |  
|Accrued interest
 receivable                                                                                                                  |  |                                 | 7,952     |                   |   | 9,267     |  
|Intangible assets, net of
 accumulated amortization                                                                                           |  |                                 | 2,734     |                   |   | 3,347     |  
|Other real estate owned                                                                                                                       |  |                                 | 18,372    |                   |   | 17,658    |  
|Other assets                                                                                                                                  |  |                                 | 9,135     |                   |   | 11,430    |  
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|TOTAL ASSETS                                                                                                                                  |  | $                               | 1,111,227 |                   | $ | 1,260,730 |  
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|LIABILITIES                                                                                                                                   |  |                                 |           |                   |   |           |  
|Deposits:                                                                                                                                     |  |                                 |           |                   |   |           |  
|Demand                                                                                                                                        |  | $                               | 133,023   |                   | $ | 136,026   |  
|Interest-bearing demand                                                                                                                       |  |                                 | 368,294   |                   |   | 374,624   |  
|Savings                                                                                                                                       |  |                                 | 72,184    |                   |   | 68,292    |  
|Time                                                                                                                                          |  |                                 | 386,045   |                   |   | 496,597   |  
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|Total deposits                                                                                                                                |  |                                 | 959,546   |                   |   | 1,075,539 |  
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|Borrowings:                                                                                                                                   |  |                                 |           |                   |   |           |  
|Customer repurchase agreements                                                                                                                |  |                                 | 31,299    |                   |   | 47,327    |  
|Advances from the Federal Home Loan Bank                                                                                                      |  |                                 | 16,000    |                   |   | 31,500    |  
|Interest-bearing demand notes issued to the U.S. Treasury                                                                                     |  |                                 | 778       |                   |   | 1,021     |  
|Trust preferred securities                                                                                                                    |  |                                 | 25,000    |                   |   | 25,000    |  
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|Total borrowings                                                                                                                              |  |                                 | 73,077    |                   |   | 104,848   |  
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|Other liabilities                                                                                                                             |  |                                 | 2,118     |                   |   | 5,683     |  
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|TOTAL LIABILITIES                                                                                                                             |  |                                 | 1,034,741 |                   |   | 1,186,070 |  
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|STOCKHOLDERS
 EQUITY                                                                                                                         |  |                                 |           |                   |   |           |  
|Preferred stock: no par value, 100,000 shares authorized: 
 25,083 shares issued and outstanding at September 30, 2010 and December 31,
 2009 |  |                                 | 24,979    |                   |   | 24,958    |  
|Common stock: $5 par value, 7,000,000 shares authorized: 4,478,295 shares issued at September
 30, 2010 and December 31, 2009                 |  |                                 | 22,391    |                   |   | 22,391    |  
|Common stock warrants                                                                                                                         |  |                                 | 150       |                   |   | 150       |  
|Additional paid-in capital                                                                                                                    |  |                                 | 18,397    |                   |   | 18,423    |  
|Retained earnings                                                                                                                             |  |                                 | 27,657    |                   |   | 29,851    |  
|Accumulated other
 comprehensive income, net of taxes                                                                                         |  |                                 | 6,686     |                   |   | 2,816     |  
|Less: cost of 1,162,898
 and 1,171,926 treasury shares at September 30, 2010                                                                  |  |                                 |           |                   |   |           |  
|December 31, 2009                                                                                                                             |  |                                 | (23,774   | )                 |   | (23,929   | )
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                    |  |                                 | 76,486    |                   |   | 74,660    |  
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                    |  | $                               | 1,111,227 |                   | $ | 1,260,730 |  
|                                                                                                                                              |  |                                 |           |                   |   |           |  
|See accompanying notes to unaudited consolidated financial statements.                                                                       

3

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Schedule 2

|                                             
|---------------------------------------------
|Princeton National Bancorp, Inc.             
|Consolidated Statements of Income (unaudited)
|(dollars in thousands,
 except share data)   

|                                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|---------------------------------------------------------------------- |  | ------------------------------------- | --------- | ------------------------------------- | - | ------------------------------------ | - | ------------------------------------ | --------- | - | - | --------- | -
|                                                                       |  | THREE
MONTHS
ENDED
September 30, 2010 |           | THREE
MONTHS
ENDED
September 30, 2009 |   | NINE
MONTHS
ENDED
September 30, 2010 |   | NINE
MONTHS
ENDED
September 30, 2009 |          
|INTEREST
 INCOME                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|                                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|Interest and fees on loans                                             |  | $                                     | 9,632     |                                       | $ | 10,951                               |   | $                                    | 30,059    |   | $ | 33,494    |  
|Interest and dividends on investment securities                        |  |                                       | 2,378     |                                       |   | 3,448                                |   |                                      | 7,713     |   |   | 9,594     |  
|Interest on
 interest-bearing time deposits in other banks             |  |                                       | 32        |                                       |   | 25                                   |   |                                      | 104       |   |   | 76        |  
|Total Interest income                                                  |  |                                       | 12,042    |                                       |   | 14,424                               |   |                                      | 37,876    |   |   | 43,164    |  
|                                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|INTEREST EXPENSE                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|                                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|Interest on deposits                                                   |  |                                       | 2,318     |                                       |   | 4,829                                |   |                                      | 8,348     |   |   | 15,079    |  
|Interest on borrowings                                                 |  |                                       | 479       |                                       |   | 712                                  |   |                                      | 1,615     |   |   | 2,178     |  
|Total interest expense                                                 |  |                                       | 2,797     |                                       |   | 5,541                                |   |                                      | 9,963     |   |   | 17,257    |  
|                                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|Net
 interest income                                                   |  |                                       | 9,245     |                                       |   | 8,883                                |   |                                      | 27,913    |   |   | 25,907    |  
|Provision for loan losses                                              |  |                                       | 6,725     |                                       |   | 2,410                                |   |                                      | 13,300    |   |   | 5,045     |  
|                                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|Net
 interest income after provision for loan losses                   |  |                                       | 2,520     |                                       |   | 6,473                                |   |                                      | 14,613    |   |   | 20,862    |  
|                                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|NON-INTEREST
 INCOME                                                   |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|Trust & farm
 management fees                                          |  |                                       | 269       |                                       |   | 296                                  |   |                                      | 850       |   |   | 1,004     |  
|Service charges on deposit
 accounts                                   |  |                                       | 1,004     |                                       |   | 1,050                                |   |                                      | 2,853     |   |   | 3,004     |  
|Other service charges                                                  |  |                                       | 469       |                                       |   | 446                                  |   |                                      | 1,436     |   |   | 1,346     |  
|Gain on sales of
 securities available-for-sale                        |  |                                       | 0         |                                       |   | 38                                   |   |                                      | 722       |   |   | 799       |  
|Brokerage fee income                                                   |  |                                       | 134       |                                       |   | 192                                  |   |                                      | 547       |   |   | 639       |  
|Mortgage servicing rights
 impairment                                  |  |                                       | (333      | )                                     |   | 0                                    |   |                                      | (922      | ) |   | (556      | )
|Mortgage banking income                                                |  |                                       | 694       |                                       |   | 498                                  |   |                                      | 1,457     |   |   | 1,983     |  
|Bank-owned life insurance                                              |  |                                       | 227       |                                       |   | 235                                  |   |                                      | 684       |   |   | 708       |  
|Other operating income                                                 |  |                                       | 10        |                                       |   | 17                                   |   |                                      | 68        |   |   | 165       |  
|Total non-interest income                                              |  |                                       | 2,474     |                                       |   | 2,772                                |   |                                      | 7,695     |   |   | 9,092     |  
|                                                                      
|NON-INTEREST
 EXPENSE                                                  |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|Salaries and employee
 benefits                                        |  |                                       | 4,628     |                                       |   | 4,821                                |   |                                      | 13,494    |   |   | 13,514    |  
|Occupancy                                                              |  |                                       | 645       |                                       |   | 640                                  |   |                                      | 1,978     |   |   | 1,952     |  
|Equipment expense                                                      |  |                                       | 782       |                                       |   | 768                                  |   |                                      | 2,296     |   |   | 2,304     |  
|Federal insurance
 assessments                                         |  |                                       | 603       |                                       |   | 566                                  |   |                                      | 1,835     |   |   | 2,089     |  
|Intangible assets
 amortization                                        |  |                                       | 204       |                                       |   | 204                                  |   |                                      | 606       |   |   | 620       |  
|Data processing                                                        |  |                                       | 355       |                                       |   | 319                                  |   |                                      | 987       |   |   | 974       |  
|Advertising                                                            |  |                                       | 154       |                                       |   | 169                                  |   |                                      | 536       |   |   | 577       |  
|Other real estate expenes,
 net                                        |  |                                       | 446       |                                       |   | 312                                  |   |                                      | 1,567     |   |   | 821       |  
|Loan collection expenses                                               |  |                                       | 104       |                                       |   | 123                                  |   |                                      | 492       |   |   | 325       |  
|Impairment of land
 held-for-sale                                      |  |                                       | 110       |                                       |   | 0                                    |   |                                      | 110       |   |   | 0         |  
|Other operating expense                                                |  |                                       | 1,016     |                                       |   | 1,079                                |   |                                      | 3,248     |   |   | 3,301     |  
|Total non-interest expense                                             |  |                                       | 9,047     |                                       |   | 9,001                                |   |                                      | 27,149    |   |   | 26,477    |  
|                                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|Income
 (Loss) before income taxes                                     |  |                                       | (4,053    | )                                     |   | 244                                  |   |                                      | (4,841    | ) |   | 3,477     |  
|Income tax benefit                                                     |  |                                       | (2,142    | )                                     |   | (516                                 | ) |                                      | (3,609    | ) |   | (338      | )
|                                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|Net
 income (loss)                                                     |  |                                       | (1,911    | )                                     |   | 760                                  |   |                                      | (1,232    | ) |   | 3,815     |  
|                                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|Preferred stock dividends                                              |  |                                       | 314       |                                       |   | 313                                  |   |                                      | 941       |   |   | 868       |  
|Accretion of preferred
 stock discount                                 |  |                                       | 7         |                                       |   | 7                                    |   |                                      | 21        |   |   | 18        |  
|                                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|Net
 income (loss) available to common stockholders                    |  | ($                                    | 2,232     | )                                     | $ | 440                                  |   | ($                                   | 2,194     | ) | $ | 2,929     |  
|                                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|Net income (loss) per share available to common
 stockholders:         |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|BASIC                                                                  |  | ($                                    | 0.67      | )                                     | $ | 0.13                                 |   | ($                                   | 0.66      | ) | $ | 0.89      |  
|DILUTED                                                                |  | ($                                    | 0.67      | )                                     | $ | 0.13                                 |   | ($                                   | 0.66      | ) | $ | 0.89      |  
|                                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|Basic weighted average
 shares outstanding                             |  |                                       | 3,313,029 |                                       |   | 3,302,172                            |   |                                      | 3,309,869 |   |   | 3,300,148 |  
|Diluted weighted average
 shares outstanding                           |  |                                       | 3,313,029 |                                       |   | 3,302,812                            |   |                                      | 3,309,869 |   |   | 3,300,688 |  
|                                                                       |  |                                       |           |                                       |   |                                      |   |                                      |           |   |   |           |  
|See accompanying notes to unaudited consolidated financial statements.

4

---



Schedule 3

Princeton National Bancorp, Inc. and
SubsidiaryConsolidated Statements of Changes in Stockholders Equity (Unaudited)
(dollars in thousands except per share data)

|                                                                                                 |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 |        |       |   |       |  |    |         |   |   |         |  
|------------------------------------------------------------------------------------------------ |  | ---------------- | ------ | ------------- | - | ----------------------- |  | ---------------------------- | --- | ------------------ | - | ------------------------------------------------------------- | - | --------------- | ------ | ----- | - | ----- |  | -- | ------- | - | - | ------- | -
|For the Nine Months Ended
 September 30, 2010                                                    |  | Preferred
 Stock |        | Common
 Stock |   | Common
 Stock
 Warrants |  | Additional
 Paid-in
 Capital |     | Retained
 Earnings |   | Accumulated
 Other
 Comprehensive
 Income,
 net of tax effect |   | Treasury
 Stock |        | Total |  
|                                                                                                 |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 |        |       |   |       |  |    |         |   |   |         |  
|Balance, January 1, 2010                                                                         |  | $                | 24,958 |               | $ | 22,391                  |  | $                            | 150 |                    | $ | 18,423                                                        |   | $               | 29,851 |       | $ | 2,816 |  | ($ | 23,929  | ) | $ | 74,660  |  
|                                                                                                 |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 |        |       |   |       |  |    |         |   |   |         |  
|Net loss                                                                                         |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 | (1,232 | )     |   |       |  |    |         |   |   | (1,232  | )
|Dividends on preferred stock                                                                     |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 | (941   | )     |   |       |  |    |         |   |   | (941    | )
|Accretion on preferred stock discount                                                            |  |                  | 21     |               |   |                         |  |                              |     |                    |   |                                                               |   |                 | (21    | )     |   |       |  |    |         |   |   |        |  
|Sale of 7,028 shares of treasury common stock                                                    |  |                  |        |               |   |                         |  |                              |     |                    |   | (78                                                           | ) |                 |        |       |   |       |  |    | 121     |   |   | 43      |  
|Award of 2,000 shares of restricted common stock oot of treasury
 common stock                   |  |                  |        |               |   |                         |  |                              |     |                    |   | (14                                                           | ) |                 |       |       |   |       |  |    | 34      |   |   | 20      |  
|Stock option compensation expense                                                                |  |                  |        |               |   |                         |  |                              |     |                    |   | 66                                                            |   |                 |        |       |   |       |  |    |         |   |   | 66      |  
|Other comprehensive income, net of $2,448 tax effect                                             |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 |        |       |   | 3,870 |  |    |         |   |   | 3,870   |  
|                                                                                                 |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 |        |       |   |       |  |    |         |   |   |         |  
|Balance, September 30, 2010                                                                      |  | $                | 24,979 |               | $ | 22,391                  |  | $                            | 150 |                    | $ | 18,397                                                        |   | $               | 27,657 |       | $ | 6,686 |  | ($ | 23,774  | ) | $ | 76,486  |  
|                                                                                                 |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 |        |       |   |       |  |    |         |   |   |         |  
|For the Nine Months Ended September 30, 2009                                                     |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 |        |       |   |       |  |    |         |   |   |         |  
|                                                                                                 |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 |        |       |   |       |  |    |         |   |   |         |  
|Balance, January 1, 2009                                                                         |  | $                |       |               | $ | 22,391                  |  | $                            |    |                    | $ | 18,420                                                        |   | $               | 54,329 |       | $ | 1,402 |  | $  | (24,071 | ) | $ | 72,471  |  
|                                                                                                 |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 |        |       |   |       |  |    |         |   |   |         |  
|Net income                                                                                       |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 | 3,815  |       |   |       |  |    |         |   |   | 3,815   |  
|Issuance of 25,083 shares of preferred stock and 155,025 common stock
 warrants, net of expenses |  |                  | 24,933 |               |   |                         |  |                              | 150 |                    |   | (63                                                           | ) |                 |        |       |   |       |  |    |         |   |   | 25,020  |  
|Dividends on preferred stock                                                                     |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 | (703   | )     |   |       |  |    |         |   |   | (703    | )
|Accretion on preferred stock discount                                                            |  |                  | 18     |               |   |                         |  |                              |     |                    |   |                                                               |   |                 | (18    | )     |   |       |  |    |         |   |   |        |  
|Sale of 5,522 shares of treasury common stock                                                    |  |                  |        |               |   |                         |  |                              |     |                    |   | (11                                                           | ) |                 |        |       |   |       |  |    | 94      |   |   | 83      |  
|Dividends on common stock ($.56 per share)                                                       |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 | (1,848 | )     |   |       |  |    |         |   |   | (1,848  | )
|Stock option compensation expense                                                                |  |                  |        |               |   |                         |  |                              |     |                    |   | 71                                                            |   |                 |        |       |   |       |  |    |         |   |   | 71      |  
|Other comprehensive income, net of $2,595 tax effect                                             |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 |        |       |   | 4,103 |  |    |         |   |   | 4,103   |  
|                                                                                                 |  |                  |        |               |   |                         |  |                              |     |                    |   |                                                               |   |                 |        |       |   |       |  |    |         |   |   |         |  
|Balance, September 30, 2009                                                                      |  | $                | 24,951 |               | $ | 22,391                  |  | $                            | 150 |                    | $ | 18,417                                                        |   | $               | 55,575 |       | $ | 5,505 |  | ($ | 23,977  | ) | $ | 103,012 |  

|                                                                      
|----------------------------------------------------------------------
|                                                                      
|See
 accompanying notes to unaudited consolidated financial statements

5

---



Schedule 4

Princeton National Bancorp, Inc. and
Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)

|                                                                                          |  |                                         |          |      |   |          |  
|----------------------------------------------------------------------------------------- |  | --------------------------------------- | -------- | ---- | - | -------- | -
|                                                                                          |  | For the Nine Months Ended
 September 30 |         
|                                                                                          |  | 2010                                    |          | 2009 |  
|                                                                                          |  |                                         |          |      |   |          |  
|Operating activities:                                                                     |  |                                         |          |      |   |          |  
|Net income (loss)                                                                         |  | ($                                      | 1,232    | )    | $ | 3,815    |  
|Adjustments to reconcile net income (loss)
 to net cash provided by operating activities: |  |                                         |          |      |   |          |  
|Depreciation                                                                              |  |                                         | 1,577    |      |   | 1,644    |  
|Provision for loan losses                                                                 |  |                                         | 13,300   |      |   | 5,045    |  
|Amortization of intangible assets and other
 purchase accounting adjustments, net         |  |                                         | 606      |      |   | 622      |  
|Amortization of premiums and discounts on
 investment securities, net                     |  |                                         | 1,178    |      |   | 1,029    |  
|Gain on sales of securities
 available-for-sale, net                                      |  |                                         | (722     | )    |   | (799     | )
|Impairment of mortgage servicing rights                                                   |  |                                         | 589      |      |   | 556      |  
|Compensation expense for vested stock
 options                                            |  |                                         | 66       |      |   | 71       |  
|Gains (losses) on sales and write downs of
 other real estate owned, net                  |  |                                         | (301     | )    |   | 52       |  
|Impairment of land held-for-sale                                                          |  |                                         | 110      |      |   | 0        |  
|Loans originated for sale                                                                 |  |                                         | (75,740  | )    |   | (113,871 | )
|Proceeds from sales of loans originated for
 sale                                         |  |                                         | 77,948   |      |   | 110,542  |  
|Decrease in accrued interest payable                                                      |  |                                         | (1,358   | )    |   | (515     | )
|Decrease in accrued interest receivable                                                   |  |                                         | 1,315    |      |   | 150      |  
|Decrease (increase) in other assets                                                       |  |                                         | 777      |      |   | (717     | )
|Decrease in other liabilities                                                             |  |                                         | (4,375   | )    |   | (1,670   | )
|                                                                                          |  |                                         |          |      |   |          |  
|Net cash provided by operating activities                                                 |  |                                         | 13,738   |      |   | 5,954    |  
|                                                                                          |  |                                         |          |      |   |          |  
|Investing activities:                                                                     |  |                                         |          |      |   |          |  
|Proceeds from sales of investment
 securities available-for-sale                          |  |                                         | 42,929   |      |   | 44,564   |  
|Proceeds from maturities of investment
 securities available-for-sale                     |  |                                         | 27,107   |      |   | 52,043   |  
|Purchase of investment securities
 available-for-sale                                     |  |                                         | (5,828   | )    |   | (174,181 | )
|Proceeds from maturities of investment
 securities held-to-maturity                       |  |                                         | 200      |      |   | 1,300    |  
|Purchase of investment securities
 held-to-maturity                                       |  |                                         | (1,690   | )    |   | (2,105   | )
|Purchase of Federal Reserve Bank stock                                                    |  |                                         | (268     | )    |   | (19      | )
|Proceeds from sales of other real estate
 owned                                           |  |                                         | 7,283    |      |   | 398      |  
|Net decrease in loans                                                                     |  |                                         | 55,789   |      |   | 2,193    |  
|Purchases of premises and equipment                                                       |  |                                         | (417     | )    |   | (910     | )
|                                                                                          |  |                                         |          |      |   |          |  
|Net cash provided by (used in) investing
 activities                                      |  |                                         | 125,105  |      |   | (76,717  | )
|                                                                                          |  |                                         |          |      |   |          |  
|Financing activities:                                                                     |  |                                         |          |      |   |          |  
|Net increase (decrease) in deposits                                                       |  |                                         | (115,993 | )    |   | 102,681  |  
|Net decrease in borrowings                                                                |  |                                         | (31,771  | )    |   | (9,709   | )
|Dividends on common stock                                                                 |  |                                         | 0        |      |   | (1,848   | )
|Dividends on preferred stock                                                              |  |                                         | (941     | )    |   | (703     | )
|Sales of treasury common stock                                                            |  |                                         | 43       |      |   | 83       |  
|Award of restricted stock                                                                 |  |                                         | 20       |      |   | 0        |  
|Proceeds from issuance of preferred stock
 and common stock warrants, net of expenses     |  |                                         | 0        |      |   | 25,020   |  
|                                                                                          |  |                                         |          |      |   |          |  
|Net cash provided by (used in) financing
 activities                                      |  |                                         | (148,642 | )    |   | 115,524  |  
|                                                                                          |  |                                         |          |      |   |          |  
|Increase (decrease) in cash and cash
 equivalents                                         |  |                                         | (9,799   | )    |   | 44,761   |  
|Cash and cash equivalents at beginning of
 period                                         |  |                                         | 71,073   |      |   | 20,261   |  
|                                                                                          |  |                                         |          |      |   |          |  
|Cash and cash equivalents at September 30                                                 |  | $                                       | 61,274   |      | $ | 65,022   |  
|                                                                                          |  |                                         |          |      |   |          |  
|                                                                                          |  |                                         |          |      |   |          |  
|                                                                                          |  |                                         |          |      |   |          |  
|Supplemental disclosures of cash flow
 information:                                       |  |                                         |          |      |   |          |  
|Cash paid during the period for:                                                          |  |                                         |          |      |   |          |  
|Interest                                                                                  |  | $                                       | 11,321   |      | $ | 17,648   |  
|Income taxes                                                                              |  | $                                       | 1,134    |      | $ | 2,040    |  
|                                                                                          |  |                                         |          |      |   |          |  
|Supplemental disclosures of non-cash flow
 activities:                                    |  |                                         |          |      |   |          |  
|Loans transferred to other real estate
 owned                                             |  | $                                       | 7,696    |      | $ | 14,145   |  

|                                                                      
|----------------------------------------------------------------------
|                                                                      
|See
 accompanying notes to unaudited consolidated financial statements

6

---



Schedule 5

PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARYNotes to Consolidated Financial Statements
(Unaudited)

The
accompanying unaudited condensed consolidated financial statements reflect all
adjustments, which, in the opinion of management, are necessary for a fair
presentation of the results of the three and nine month periods ended September
30, 2010 and 2009, and all such adjustments are of a normal recurring nature.
The 2009 year-end consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.

The
unaudited consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information
required by accounting principles generally accepted in the United States of
America for complete financial statements and related footnote disclosures. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) considered for a fair presentation of the results for the interim
period have been included. For further information, refer to the consolidated
financial statements and notes included in the Registrants 2009 Annual Report
on Form 10-K. Results of operations for interim periods are not necessarily
indicative of the results that may be expected for the year. Certain amounts in
the 2009 consolidated financial statements have been reclassified to conform to
the 2010 presentation.

NOTE 1  CAPITAL
PURCHASE PROGRAM

On
January 23, 2009, the Corporation received $25,083,000 of equity capital by
issuing to the United States Department of Treasury 25,083 shares of the
Corporations 5.00% Series B Fixed Rate Cumulative Perpetual Preferred Stock,
no par value, with a liquidation preference of $1,000 per share and a ten-year
warrant to purchase up to 155,025 shares of the Corporations common stock, par
value $5.00 per share, at an exercise price of $24.27 per share. The proceeds
received were allocated to the preferred stock and common stock warrants based
on their relative fair values. The resulting discount on the preferred stock is
amortized against retained earnings and is reflected in the Corporations
consolidated statement of income as Preferred stock dividends, resulting in
additional dilution to the Corporations earnings per common share. The
warrants are immediately exercisable, in whole or in part, over a term of 10
years. The warrants were included in the Corporations diluted average common
shares outstanding (subject to anti-dilution). Both the preferred securities
and warrants were accounted for as additions to the Corporations regulatory
Tier 1 and total capital.

The
Series B Preferred stock is not mandatorily redeemable and will pay cumulative
dividends at a rate of 5% per year for the first five years and 9% per year
thereafter. Any redemption requires Federal Reserve approval. The Series B
Perpetual Preferred stock ranks senior to the Corporations existing authorized
Series A Junior Participating Preferred stock.

A
company that participates must adopt certain standards for executive
compensation, including (a) prohibiting golden parachute payments as defined
in the Emergency Economic Stabilization Act of 2008 (EESA) to senior Executive
Officers; (b) requiring recovery of any compensation paid to senior Executive
Officers based on criteria that is later proven to be materially inaccurate;
(c) prohibiting incentive compensation that encourages unnecessary and
excessive risks that threaten the value of the financial institution; and (d)
accepting restrictions on the payment of dividends and the repurchase of common
stock.

7

---



NOTE 2  EARNINGS PER SHARE CALCULATION

The
following table sets forth the computation of basic and diluted earnings per
share for the periods indicated:

|                                                                   |  |                                    |           |                                   |   |           |  |      |           |   |   |           | 
|------------------------------------------------------------------ |  | ---------------------------------- | --------- | --------------------------------- | - | --------- |  | ---- | --------- | - | - | --------- | 
|(in thousands, except share data)                                  |  | Three
 Months Ended
 September 30, |           | Nine
 Months Ended
 September 30, |  
|                                                                   |  | 2010                               |           | 2009                              |   | 2010      |  | 2009 |          
|Numerator:                                                         |  |                                    |           |                                   |   |           |  |      |           |   |   |           | 
|Net income
 (loss) available to common stockholders                |  | $                                  | (2,232    | )                                 | $ | 440       |  | $    | (2,194    | ) | $ | 2,929     | 
|                                                                   |  |                                    |           |                                   |   |           |  |      |           |   |   |           | 
|Denominator:                                                       |  |                                    |           |                                   |   |           |  |      |           |   |   |           | 
|Basic earnings per share  weighted average common shares          |  |                                    | 3,313,029 |                                   |   | 3,302,172 |  |      | 3,309,869 |   |   | 3,300,148 | 
|Effect of dilutive securities  stock options                      |  |                                    |          |                                   |   | 640       |  |      |          |   |   | 540       | 
|Diluted earnings per share adjusted weighted average common shares |  |                                    | 3,313,029 |                                   |   | 3,302,812 |  |      | 3,309,869 |   |   | 3,300,688 | 
|                                                                   |  |                                    |           |                                   |   |           |  |      |           |   |   |           | 
|Net income (loss) per share available for common stockholders:     |  |                                    |           |                                   |   |           |  |      |           |   |   |           | 
|Basic                                                              |  | $                                  | (0.67     | )                                 | $ | 0.13      |  | $    | (0.66     | ) | $ | 0.89      | 
|Diluted                                                            |  | $                                  | (0.67     | )                                 | $ | 0.13      |  | $    | (0.66     | ) | $ | 0.89      | 

The
following shares were not considered in computing diluted earnings per share
for the three and nine month periods ended September 30, 2010 and 2009 because
they were anti-dilutive:

|                                                                               |  |                                    |         |                                   |  |         |  |      |         |  |  |         | 
|------------------------------------------------------------------------------ |  | ---------------------------------- | ------- | --------------------------------- |  | ------- |  | ---- | ------- |  |  | ------- | 
|                                                                               |  | Three
 Months Ended
 September 30, |         | Nine
 Months Ended
 September 30, | 
|                                                                               |  | 2010                               |         | 2009                              |  | 2010    |  | 2009 |        
|                                                                               |  |                                    |         |                                   |  |         |  |      |         |  |  |         | 
|Stock options to purchase
 shares of common stock                              |  |                                    | 522,511 |                                   |  | 448,061 |  |      | 522,511 |  |  | 456,627 | 
|Average diluted potential common shares associated with common stock
 warrants |  |                                    | 155,025 |                                   |  | 155,025 |  |      | 155,025 |  |  | 155,025 | 

NOTE 3  INTANGIBLE ASSETS

The balance
of intangible assets, net of accumulated amortization, totaled $2,734,000 and
$3,347,000 at September 30, 2010 and December 31, 2009, respectively.

The
Corporation had a goodwill impairment study performed as of December 31, 2009.
If the implied fair value of goodwill is lower than its carrying amount,
goodwill impairment is indicated and goodwill is written down to its implied
fair value. Subsequent increases in goodwill value are not recognized in the
financial statements. The goodwill was deemed impaired as of December 31, 2009
and written off in its entirety.

8

---



The
following table summarizes the Corporations intangible assets, which are
subject to amortization, as of September 30, 2010 and December 31, 2009:

|                         |  |                         |       |                           |   |                         |   |                           |       |  |   |        |  
|------------------------ |  | ----------------------- | ----- | ------------------------- | - | ----------------------- | - | ------------------------- | ----- |  | - | ------ | -
|(in thousands)           |  | September 30, 2010      |       | December 31, 2009         |  
|                         |  | Gross
 Carrying
 Amount |       | Accumulated
 Amortization |   | Gross
 Carrying
 Amount |   | Accumulated
 Amortization |      
|                         |  |                         |       |                           |   |                         |   |                           |       |  |   |        |  
|Core deposit intangibles |  | $                       | 9,004 |                           | $ | (6,320                  | ) | $                         | 9,004 |  | $ | (5,715 | )
|Other intangible assets  |  |                         | 234   |                           |   | (184                    | ) |                           | 234   |  |   | (176   | )
|Total                    |  | $                       | 9,238 |                           | $ | (6,504                  | ) | $                         | 9,238 |  | $ | (5,891 | )

Amortization
expense of all intangible assets totaled $606,000 and $622,000 for the nine
months ended September 30, 2010 and 2009, respectively. The amortization
expense of these intangible assets will be approximately $204,000 for the
remaining three months of 2010.

NOTE 4  ORIGINATED
MORTGAGE SERVICING RIGHTS

The
Corporation has originated mortgage servicing rights which are included in
other assets on the consolidated balance sheets. Mortgage servicing rights are
amortized in proportion to, and over the period of, estimated net servicing
income on a basis similar to the interest method using an accelerated
amortization method and are subject to periodic impairment testing. A non-cash
impairment expense of $333,000 was recognized in the third quarter of 2010
based upon the results of an independent third party valuation study. A total
of $992,000 of non-cash impairment expense has been recognized during the nine
months ended September 30, 2010, compared to $556,000 for the same period in
2009. Changes in the carrying value of capitalized mortgage servicing
rights are summarized as follows:

|                                 |  |   |       |  
|-------------------------------- |  | - | ----- | -
|(in thousands)                   |  |   |       |  
|                                 |  |   |       |  
|Balance,
 January 1, 2010        |  | $ | 3,285 |  
|Servicing rights capitalized     |  |   | 598   |  
|Amortization of servicing rights |  |   | (421  | )
|Impairment of servicing rights   |  |   | (922  | )
|Balance,
 September 30, 2010     |  | $ | 2,540 |  

Activity in
the valuation allowance for mortgage servicing rights was as follows:

|                             |  |   |       | 
|---------------------------- |  | - | ----- | 
|(in thousands)               |  |   |       | 
|                             |  |   |       | 
|Balance,
 January 1, 2010    |  | $ | 185   | 
|Additions                    |  |   | 922   | 
|Reductions                   |  |   |      | 
|Direct write-downs           |  |   |      | 
|Balance,
 September 30, 2010 |  | $ | 1,107 | 

9

---



The
Corporation services loans for others with unpaid principal balances at
September 30, 2010 and December 31, 2009 of approximately $386.6 million, and
$363.9 million, respectively.

The
following table shows the future estimated amortization expense for mortgage
servicing rights based on existing balances as of September 30, 2010. The
Corporations actual amortization expense in any given period may be
significantly different from the estimated amounts displayed depending on the
amount of additional mortgage servicing rights, changes in mortgage interest
rates, estimated prepayment speeds, and market conditions.

Estimated Amortization Expense:

|                                              |  |                       |      
|--------------------------------------------- |  | --------------------- | -----
|                                              |  | Amount (in thousands)
|For the
 three months ended December 31, 2010 |  | $                     | 71   
|For the year
 ended December 31, 2011         |  |                       | 280  
|For the year
 ended December 31, 2012         |  |                       | 263  
|For the year
 ended December 31, 2013         |  |                       | 246  
|For the year
 ended December 31, 2014         |  |                       | 231  
|For the year
 ended December 31, 2015         |  |                       | 217  
|Thereafter                                    |  |                       | 1,232

NOTE 5  OTHER
COMPREHENSIVE INCOME

Other
comprehensive income components and related taxes for the nine months ended
September 30, 2010 and 2009 were as follows:

|                                                                   |  |      |       |      |   |       |  
|------------------------------------------------------------------ |  | ---- | ----- | ---- | - | ----- | -
|(in thousands)                                                     |  | 2010 |       | 2009 |  
|                                                                   |  |      |       |      |   |       |  
|Net
 unrealized gains on securities available-for-sale             |  | $    | 7,040 |      | $ | 7,497 |  
|Reclassification
 adjustment for realized gains included in income |  |      | (722  | )    |   | (799  | )
|Other
 comprehensive income, before tax effect                     |  |      | 6,318 |      |   | 6,698 |  
|Less: tax
 expense                                                 |  |      | 2,448 |      |   | 2,595 |  
|Other
 comprehensive income                                        |  | $    | 3,870 |      | $ | 4,103 |  

The components of accumulated
other comprehensive income, included in stockholders equity at September 30,
2010 and 2009 are as follows:

|                                                      |  |      |        |      |   |       |  
|----------------------------------------------------- |  | ---- | ------ | ---- | - | ----- | -
|(in thousands)                                        |  | 2010 |        | 2009 |  
|                                                      |  |      |        |      |   |       |  
|Net
 unrealized gain on securities available-for-sale |  | $    | 11,445 |      | $ | 9,517 |  
|Net unrealized
 benefit obligations                   |  |      | (531   | )    |   | (531  | )
|                                                      |  |      | 10,914 |      |   | 8,986 |  
|Less: tax
 effect                                     |  |      | 4,228  |      |   | 3,481 |  
|Net-of-tax
 amount                                    |  | $    | 6,686  |      | $ | 5,505 |  

10

---



NOTE 6  FEDERAL HOME LOAN BANK STOCK

The
subsidiary bank held Federal Home Loan Bank stock totaling $2,373,000 at
September 30, 2010 and December 31, 2009. The Federal Home Loan Bank of Chicago
is operating under a Cease and Desist Order from their regulator, the Federal
Housing Finance Board. The Federal Home Loan Bank will continue to provide
liquidity and funding through advances, however, the order prohibits capital
stock repurchases until a time to be determined by the Federal Housing Finance
Board and requires their approval for dividends. With regard to dividends, the
Federal Home Loan Bank will continue to assess its dividend capacity each
quarter and make appropriate request for approval. There were no dividends paid
by the Federal Home Loan Bank of Chicago during the first nine months of 2010
or during 2009. Management performed an analysis and deemed the cost method
investment in Federal Home Loan Bank stock was ultimately recoverable as of
September 30, 2010 and December 31, 2009.

NOTE 7  INVESTMENT SECURITIES

The
amortized cost and fair value of securities available-for-sale and
held-to-maturity are as follows at September 30, 2010:

|                                                                     |  |                |         |                      |   |                       |  |            |     |   |   |         | 
|-------------------------------------------------------------------- |  | -------------- | ------- | -------------------- | - | --------------------- |  | ---------- | --- | - | - | ------- | 
|(in thousands)                                                       |  | Amortized
Cost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair
Value |    
|Securities
available-for-sale                                        |  |                |         |                      |   |                       |  |            |     |   |   |         | 
|Obligations of U.S. government agencies and sponsored entities(1)(2) |  | $              | 10,220  |                      | $ | 602                   |  | $          |    |   | $ | 10,822  | 
|Obligations of states and political subdivisions                     |  |                | 110,968 |                      |   | 6,969                 |  |            | (50 | ) |   | 117,887 | 
|Other mortgage-backed securities, includes CMOs (3)                  |  |                | 96,703  |                      |   | 3,929                 |  |            | (5  | ) |   | 100,627 | 
|Total securities available-for-sale                                  |  | $              | 217,891 |                      | $ | 11,500                |  | $          | (55 | ) | $ | 229,336 | 
|Securities held-to-maturity                                          |  |                |         |                      |   |                       |  |            |     |   |   |         | 
|Obligations of states and political subdivisions                     |  | $              | 15,075  |                      | $ | 561                   |  | $          | (7  | ) | $ | 15,629  | 
|Total securities                                                     |  | $              | 232,966 |                      | $ | 12,061                |  | $          | (62 | ) | $ | 244,965 | 

|                                                                                                                               | 
|------------------------------------------------------------------------------------------------------------------------------ | 
|                                                                                                                               | 
|                                                                                                                              
|(1)
Includes obligations of the Government National Mortgage Association
(GNMA).                                            
|                                                                                                                               | 
|(2)
Includes obligations of the Federal Home Loan Mortgage Corporation (FHLMC)
and Fannie Mae Mortgage Association (FNMA).
|                                                                                                                               | 
|(3)
Includes obligations issued or guaranteed by FNMA, FHLMC or GNMA.                                                         

The
amortized cost and fair value of securities available-for-sale and
held-to-maturity are as follows at December 31, 2009:

|                                                                     |  |                |         |                      |   |                       |  |            |        |   |   |         | 
|-------------------------------------------------------------------- |  | -------------- | ------- | -------------------- | - | --------------------- |  | ---------- | ------ | - | - | ------- | 
|(in thousands)                                                       |  | Amortized
Cost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair
Value |       
|Securities available-for-sale                                        |  |                |         |                      |   |                       |  |            |        |   |   |         | 
|Obligations of U.S. government agencies and sponsored entities(1)(2) |  | $              | 95,498  |                      | $ | 1,560                 |  | $          | (745   | ) | $ | 96,313  | 
|Obligations of states and political subdivisions                     |  |                | 116,864 |                      |   | 3,580                 |  |            | (366   | ) |   | 120,078 | 
|Other mortgage-backed securities, includes CMOs (3)                  |  |                | 70,985  |                      |   | 1,156                 |  |            | (58    | ) |   | 72,083  | 
|Total securities available-for-sale                                  |  | $              | 283,347 |                      | $ | 6,296                 |  | $          | (1,169 | ) | $ | 288,474 | 
|Securities held-to-maturity                                          |  |                |         |                      |   |                       |  |            |        |   |   |         | 
|Obligations of states and political subdivisions                     |  | $              | 12,793  |                      | $ | 547                   |  | $          | 9      |   | $ | 13,331  | 
|Total securities                                                     |  | $              | 296,140 |                      | $ | 6,843                 |  | $          | (1,160 | ) | $ | 301,805 | 

|                                                                                                                               | 
|------------------------------------------------------------------------------------------------------------------------------ | 
|                                                                                                                               | 
|(1)
Includes obligations of the FHLMC and FNMA.                                                                               
|                                                                                                                               | 
|(2)
Includes obligations of the Federal Home Loan Mortgage Corporation (FHLMC)
and Fannie Mae Mortgage Association (FNMA).
|                                                                                                                               | 
|(3)
Includes obligations issued or guaranteed by FNMA, FHLMC or GNMA.                                                         

11

---



The
following is a summary of the fair value of securities held-to-maturity and
available-for-sale with unrealized losses and an aging of those unrealized
losses:

|                                                                                          |  |                     |        |                   |   |            |   |                   |       |            |   |                   |   |   |        |  |   |        |  
|----------------------------------------------------------------------------------------- |  | ------------------- | ------ | ----------------- | - | ---------- | - | ----------------- | ----- | ---------- | - | ----------------- | - | - | ------ |  | - | ------ | -
|                                                                                          |  | September 30, 2010  |       
|(in thousands)                                                                            |  | Less Than 12 Months |        | 12 Months or More |   | Total      |  
|                                                                                          |  | Fair
Value          |        | Unrealized
Losses |   | Fair
Value |   | Unrealized
Losses |       | Fair
Value |   | Unrealized
Losses |  
|Securities available-for-sale                                                             |  |                     |        |                   |   |            |   |                   |       |            |   |                   |   |   |        |  |   |        |  
|                                                                                         
|Collateralized mortgage obligations                                                       |  | $                   | 1,239  |                   | $ | (5         | ) | $                 | 0     |            | $ |                  |   | $ | 1,239  |  | $ | (5     | )
|Obligations of states and political subdivisions                                          |  |                     | 2,944  |                   |   | (38        | ) |                   | 599   |            |   | (12               | ) |   | 3,543  |  |   | (50    | )
|                                                                                         
|Total temporarily impaired securities                                                     |  | $                   | 4,183  |                   | $ | (43        | ) | $                 | 599   |            | $ | (12               | ) | $ | 4,782  |  | $ | (55    | )
|                                                                                         
|Securities held-to-maturity                                                               |  |                     |        |                   |   |            |   |                   |       |            |   |                   |   |   |        |  |   |        |  
|Obligations of states and political subdivisions                                          |  | $                   | 475    |                   | $ | (3         | ) | $                 | 329   |            | $ | (4                | ) | $ | 804    |  | $ | (7     | )
|                                                                                          |  |                     |        |                   |   |            |   |                   |       |            |   |                   |   |   |        |  |   |        |  
|                                                                                          |  | December 31, 2009   |       
|(in thousands)                                                                            |  | Less Than 12 Months |        | 12 Months or More |   | Total      |  
|                                                                                          |  | Fair
Value          |        | Unrealized
Losses |   | Fair
Value |   | Unrealized
Losses |       | Fair
Value |   | Unrealized
Losses |  
|                                                                                         
|Obligations of U.S. government agencies and government-sponsored
entities (GSEs) (1)(2) |  | $                   | 39,012 |                   | $ | (745       | ) | $                 | 7     |            | $ |                  |   | $ | 39,019 |  | $ | (745   | )
|Obligations of states and political subdivisions                                          |  |                     | 17,114 |                   |   | (255       | ) |                   | 5,344 |            |   | (120              | ) |   | 22,458 |  |   | (375   | )
|Collateralized mortgage obligations                                                       |  |                     | 8,006  |                   |   | (58        | ) |                   | 0     |            |   | 0                 |   |   | 8,006  |  |   | (58    | )
|Total temporarily impaired securities                                                     |  | $                   | 64,132 |                   | $ | (1,058     | ) | $                 | 5,351 |            | $ | (120              | ) | $ | 69,483 |  | $ | (1,178 | )

|                                         | 
|---------------------------------------- | 
|                                         | 
|(1) Includes obligations of GNMA.       
|                                         | 
|(2) Includes issues from FNMA and FHLMC.

The
unrealized loss on available-for-sale securities is included in other
accumulated comprehensive income on the consolidated balance sheets. Management
has concluded that no individual unrealized loss as of September 30, 2010,
identified in the preceding table, represents other-than-temporary impairment.
The Corporation does not intend to sell nor would it be required to sell the
securities shown in the table with unrealized losses before recovering their
amortized cost.

Maturities
of investment securities classified as available-for-sale and held to maturity
were as follows at September 30, 2010:

|                                       |  |                         |         |            |   |         | 
|-------------------------------------- |  | ----------------------- | ------- | ---------- | - | ------- | 
|(in thousands)                         |  | Adjusted
Carrying Value |         | Fair
Value |  
|Available-for-sale:                    |  |                         |         |            |   |         | 
|Due in one year or less                |  | $                       | 1,727   |            | $ | 1,765   | 
|Due after one year through five years  |  |                         | 17,225  |            |   | 18,350  | 
|Due after five years through ten years |  |                         | 56,541  |            |   | 59,963  | 
|Due after ten years                    |  |                         | 45,695  |            |   | 48,631  | 
|                                       |  |                         | 121,188 |            |   | 128,709 | 
|Mortgage-backed securities             |  |                         | 45,650  |            |   | 47,049  | 
|Collateral mortgage obligations        |  |                         | 51,053  |            |   | 53,578  | 
|                                       |  | $                       | 217,891 |            | $ | 229,336 | 
|                                       |  |                         |         |            |   |         | 
|Held-to-maturity:                      |  |                         |         |            |   |         | 
|Due in one year or less                |  | $                       | 3,197   |            | $ | 3,209   | 
|Due after one year through five years  |  |                         | 7,989   |            |   | 8,343   | 
|Due after five years through ten years |  |                         | 3,581   |            |   | 3,769   | 
|Due after ten years                    |  |                         | 308     |            |   | 308     | 
|                                       |  | $                       | 15,075  |            | $ | 15,629  | 

12

---



Proceeds
from sales of investment securities available-for sale was $42.9 million for
the first nine months of 2010 compared to $44.6 million for the first nine
months of 2009. Net gains were realized of $722,000 and $799,000 for the first
three quarters of 2010 and 2009, respectively. The carrying value of securities
pledged as collateral, to secure public deposits and for other purposes was
$219.7 million at September 30, 2010 and $283.0 million at December 31, 2009.

NOTE 8  LOANS

The
composition of the loan portfolio, excluding loans held for sale was as
follows:

|                      |  |                    |         |                   |  |        |   |            |         |  |  |       | 
|--------------------- |  | ------------------ | ------- | ----------------- |  | ------ | - | ---------- | ------- |  |  | ----- | 
|(in thousands)        |  | September 30, 2010 |         | December 31, 2009 | 
|                      |  | Amount             |         | % of Total        |  | Amount |   | % of Total |        
|                     
|Agricultural          |  | $                  | 71,738  |                   |  | 9.9    | % | $          | 76,918  |  |  | 9.6   | 
|Commercial (1)        |  |                    | 139,876 |                   |  | 19.2   |   |            | 244,049 |  |  | 30.6  | 
|Real Estate:          |  |                    |         |                   |  |        |   |            |         |  |  |       | 
|1-4 family residences |  |                    | 95,936  |                   |  | 13.2   |   |            | 123,374 |  |  | 15.4  | 
|Agricultural          |  |                    | 45,825  |                   |  | 6.3    |   |            | 61,022  |  |  | 7.6   | 
|Construction (1)      |  |                    | 105,830 |                   |  | 14.5   |   |            | 24,118  |  |  | 3.0   | 
|Commercial            |  |                    | 206,316 |                   |  | 28.3   |   |            | 198,914 |  |  | 24.9  | 
|                      |  |                    |         |                   |  |        |   |            |         |  |  |       | 
|Total Real Estate     |  |                    | 453,907 |                   |  | 62.3   |   |            | 407,428 |  |  | 51.1  | 
|                      |  |                    |         |                   |  |        |   |            |         |  |  |       | 
|Installment           |  |                    | 62,253  |                   |  | 8.6    |   |            | 69,679  |  |  | 8.7   | 
|                      |  |                    |         |                   |  |        |   |            |         |  |  |       | 
|Total loans           |  | $                  | 727,774 |                   |  | 100.0  | % | $          | 798,074 |  |  | 100.0 | 

|                                                                                      | 
|------------------------------------------------------------------------------------- | 
|                                                                                      | 
|(1)
Loans previously classified as commercial have been reclassified as
construction.

During 2010
and 2009, the Corporation experienced a higher level of charge-offs due in part
to the economic environment, particularly in the commercial sector.
Accordingly, with the higher charge-offs and the increased level of
non-performing loans, the Corporation recorded a provision for loan losses of
$13.3 million for the nine months ended September 30, 2010 compared to $11.1
million for the year ended December 31, 2009. Changes in the allowance for loan
losses for the period ended September 30, 2010 and December 31, 2009 were as
follows:

|                                           |  |                    |        |                   |   |        |  
|------------------------------------------ |  | ------------------ | ------ | ----------------- | - | ------ | -
|(in thousands)                             |  | September 30, 2010 |        | December 31, 2009 |  
|                                           |  |                    |        |                   |  
|Balance beginning of the year              |  | $                  | 12,075 |                   | $ | 5,064  |  
|Provision for loan losses                  |  |                    | 13,300 |                   |   | 11,062 |  
|Loans charged-off                          |  |                    | 6,982  |                   |   | 4,256  |  
|Recoveries of loans previously charged off |  |                    | (160   | )                 |   | (205   | )
|Balance end of the period                  |  | $                  | 18,553 |                   | $ | 12,075 |  

13

---



NOTE 9
 FAIR VALUE OF ASSETS AND LIABILITIES

ASC
820 defines the fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC 820 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.

In
accordance with ASC 820, the Corporation groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value. These levels are:

| |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Level
 1 | Valuations
 for assets and liabilities traded in active exchange markets, such as the New
 York Stock Exchange. Valuations are obtained from readily available pricing
 sources for market transactions involving identical assets or liabilities.                                                                                                                                                                                                                                                                        
| |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Level
 2 | Valuations
 for assets and liabilities traded in less active dealer or broker markets.
 Valuations are obtained from third party pricing services for identical or
 comparable assets or liabilities which use observable inputs other than Level
 1 prices, such as quoted prices for similar assets or liabilities; quoted
 prices in markets that are not active; or other inputs that are observable or
 can be corroborated by observable market data for substantially the full term
 of the assets and liabilities.
| |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Level
 3 | Unobservable
 inputs that are supported by little or no market activity and that are
 significant to the fair value of the assets or liabilities. Financial
 Accounting Standards Board Accounting Standards Codification 820 (ASC 820),
 Fair Value Measurements, defines fair value, establishes a framework for
 measuring fair value and expands disclosures about fair value measurements.
 ASC 820 has been applied prospectively as of the beginning of the period.                                            

Following
is a description of the valuation methodologies used for instruments measured
at fair value on a recurring basis and recognized in the accompanying balance
sheet.

Available-for-Sale Securities

The
fair value of available-for-sale securities are determined by various valuation
methodologies. Where quoted market prices are available in an active market,
securities are classified within Level 1. The Corporation has no securities
classified within Level 1. If quoted market prices are not available, then fair
values are estimated by using pricing models or quoted prices of securities
with similar characteristics. For these investments, the inputs used by the
pricing service to determine fair value may include one, or a combination or,
observable inputs such as benchmark yields, reported trades, broker/dealer
quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers
and reference data market research publications and are classified within Level
2 of the valuation hierarchy. Level 2 securities include Obligations of U.S.
Treasury securities, Obligations of U.S. government corporations and agencies,
obligations of states and political subdivisions, mortgage-backed securities,
and collateralized mortgage obligations. In certain cases where Level 1 or
Level 2 inputs are not available, securities are classified within Level 3 of
the hierarchy. The Corporation has no securities classified within Level 3.

14

---



The
following table presents the Corporations assets that are measured at fair
value on a recurring basis and the level within the ASC 820 hierarchy in which
the fair value measurements fall as of September 30, 2010 and December 31, 2009
(in thousands):

|                                                                                              |  |            |         |                                                                                |                               |                                                 |  |                               |         |  |   |   | 
|--------------------------------------------------------------------------------------------- |  | ---------- | ------- | ------------------------------------------------------------------------------ | ----------------------------- | ----------------------------------------------- |  | ----------------------------- | ------- |  | - | - | 
|September
 30, 2010                                                                           |  |            |         |                                                                                | Fair Value Measurements Using |                                                
|(in thousands)                                                                                |  | Fair Value |         | Quoted Prices in
 Significant
 Active Markets for
 Identical Assets
 (Level 1) |                               | Significant Other
 Observable Inputs
 (Level 2) |  | Unobservable
 Inputs(Level 3) |        
|                                                                                             
|Available-for-sale securities                                                                 |  |            |         |                                                                                |                               |                                                 |  |                               |         |  |   |   | 
|United States Government and Federal agency and U.S. Government
 sponsored Enterprises (GSEs) |  | $          | 10,822  |                                                                                | $                             |                                                |  | $                             | 10,822  |  | $ |  | 
|                                                                                             
|State and Municipal                                                                           |  |            | 117,887 |                                                                                |                               |                                                |  |                               | 117,887 |  |   |  | 
|Collateral mortgage obligations:                                                              |  |            |         |                                                                                |                               |                                                 |  |                               |         |  |   |   | 
|GSE Residential                                                                               |  |            | 100,627 |                                                                                |                               |                                                |  |                               | 100,627 |  |   |  | 
|Total                                                                                         |  | $          | 229,336 |                                                                                | $                             |                                                |  | $                             | 229,336 |  | $ |  | 

|                                                                                                                            |  |            |         |                                                                                |                               |                                                 |  |                               |         |  |   |   | 
|--------------------------------------------------------------------------------------------------------------------------- |  | ---------- | ------- | ------------------------------------------------------------------------------ | ----------------------------- | ----------------------------------------------- |  | ----------------------------- | ------- |  | - | - | 
|December
 31, 2009                                                                                                          |  |            |         |                                                                                | Fair Value Measurements Using |                                                
|(in thousands)                                                                                                              |  | Fair Value |         | Quoted Prices in
 Significant
 Active Markets for
 Identical Assets
 (Level 1) |                               | Significant Other
 Observable Inputs
 (Level 2) |  | Unobservable
 Inputs(Level 3) |        
|                                                                                                                           
|Available-for-sale securities United States Government and Federal
 agency and U.S. Government sponsored Enterprises (GSEs) |  | $          | 96,313  |                                                                                | $                             |                                                |  | $                             | 96,313  |  | $ |  | 
|                                                                                                                           
|State and Municipal                                                                                                         |  |            | 120,078 |                                                                                |                               |                                                |  |                               | 120,078 |  |   |  | 
|Collateral mortgage obligations:                                                                                            |  |            |         |                                                                                |                               |                                                 |  |                               |         |  |   |   | 
|GSE Residential                                                                                                             |  |            | 72,083  |                                                                                |                               |                                                |  |                               | 72,083  |  |   |  | 
|Total                                                                                                                       |  | $          | 288,474 |                                                                                | $                             |                                                |  | $                             | 288,474 |  | $ |  | 

Following
is a description of the valuation methodologies used for assets and liabilities
measured at fair value on a non-recurring basis and recognized in the
accompanying balance sheets, as well as the general classification of such
assets and liabilities pursuant to the valuation hierarchy.

Impaired Loans

Loans
for which it is probable that the Corporation will not collect all principal
and interest due according to contractual terms are measured for impairment in
accordance with the provisions of ASC 310-10-35, authoritative guidance for
impairments. Allowable methods for estimating fair value include using the fair
value of the collateral for collateral dependent loans or, where a loan is
determined not to be collateral dependent, using the discounted cash flow
method.

If
the impaired loan is identified as collateral dependent, then the fair value
method of measuring the amount of impairment is utilized. This method requires
obtaining a current independent appraisal of the collateral and applying a
discount factor to the value. If the impaired loan is determined not to be
collateral dependent, then the discounted cash flow method is used. This method
requires the impaired loan to be recorded at the present value of expected
future cash flows discounted at the loans effective interest rate. The
effective interest rate of a loan is the contractual interest rate adjusted for
any net deferred loan fees or costs, premiums or discount existing at
origination or acquisition of the loan. Impaired loans are classified within
Level 3 of the fair value hierarchy.

15

---



Mortgage Servicing Rights

The
fair value used to determine the valuation allowance is estimated using
discounted cash flow models. Due to the nature of the valuation inputs,
mortgage servicing rights are classified within Level 3 of the hierarchy.

Other Real Estate Owned

Other
real estate owned acquired through loan foreclosure is initially recorded at
fair value less costs to sell when acquired, establishing a new cost basis. The
adjustment at the time of foreclosure is recorded through the allowance for
loan losses. Due to the subjective nature of establishing the fair value when
the asset is acquired, the actual fair value of the other real estate owned or
foreclosed asset could differ from the original estimate. If it is determined
the fair value declines subsequent to foreclosure, a valuation allowance is
recorded through non-interest expense. Operating costs associated with the
assets after acquisition are also recorded as non-interest expense. Gains and
losses on the disposition of other real estate owned and foreclosed assets are
netted and posted to other non-interest expense.

The
following table presents the fair value measurement of assets measured at fair
value on a nonrecurring basis and the level within the ASC 820 fair value
hierarchy in which the fair value measurements fall at September 30, 2010 and
December 31, 2009 (in thousands):

|                                       |  |            |        |                                                                   |                               |                                                 |  |                                              |   |  |   |        | 
|-------------------------------------- |  | ---------- | ------ | ----------------------------------------------------------------- | ----------------------------- | ----------------------------------------------- |  | -------------------------------------------- | - |  | - | ------ | 
|September
 30, 2010                    |  |            |        |                                                                   | Fair Value Measurements Using |                                                
|(in thousands)                         |  | Fair Value |        | Quoted Prices in
 Active Markets foe
 Identical Assets
 (Level 1) |                               | Significant Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |  
|                                       |  |            |        |                                                                   |                               |                                                 |  |                                              |   |  |   |        | 
|Impaired loans (collateral
 dependent) |  | $          | 24,362 |                                                                   |                               |                                                |  |                                              |  |  | $ | 24,362 | 
|Mortgage servicing rights              |  |            | 2,540  |                                                                   |                               |                                                |  |                                              |  |  |   | 2,540  | 
|Other real estate owned                |  |            | 2,752  |                                                                   |                               |                                                |  |                                              |  |  |   | 2,752  | 

|                                       |  |            |        |                                                                   |                               |                                                 |  |                                              |   |  |   |        | 
|-------------------------------------- |  | ---------- | ------ | ----------------------------------------------------------------- | ----------------------------- | ----------------------------------------------- |  | -------------------------------------------- | - |  | - | ------ | 
|December
 31, 2009                     |  |            |        |                                                                   | Fair Value Measurements Using |                                                
|(in thousands)                         |  | Fair Value |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                               | Significant Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |  
|                                       |  |            |        |                                                                   |                               |                                                 |  |                                              |   |  |   |        | 
|Impaired loans (collateral
 dependent) |  | $          | 7,970  |                                                                   |                               |                                                |  |                                              |  |  | $ | 7,970  | 
|Mortgage servicing rights              |  |            | 3,285  |                                                                   |                               |                                                |  |                                              |  |  |   | 3,285  | 
|Other real estate owned                |  |            | 17,658 |                                                                   |                               |                                                |  |                                              |  |  |   | 17,658 | 

ASC
825, Disclosures about Fair Value of Financial Instruments, requires all
entities to disclose the estimated fair value of their financial instrument
assets and liabilities. For the Corporation, as for most financial
institutions, the majority of its assets and liabilities are considered
financial instruments as defined in ASC 825. Many of the Corporations
financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction. It is also the Corporations general practice and intent to hold
its financial instruments to maturity and to not engage in trading or sales
activities except for loans held-for-sale and available-for-sale securities.
Therefore, significant estimations and assumptions, as well as present value
calculations, were used by the Corporation for the purposes of this disclosure.

16

---



Estimated
fair values have been determined by the Corporation using the best available
data and an estimation methodology suitable for each category of financial
instruments. For those loans and deposits with floating interest rates, it is
presumed that estimated fair values generally approximate the recorded book
balances. The estimation methodologies used, the estimated fair values, and the
recorded book balances at September 30, 2010 and December 31, 2009, were as
follows:

|                                                             |  |                    |           |                   |   |                  |  |              |           |  |   |           | 
|------------------------------------------------------------ |  | ------------------ | --------- | ----------------- | - | ---------------- |  | ------------ | --------- |  | - | --------- | 
|                                                             |  | September 30, 2010 |           | December 31, 2009 |  
|(in thousands)                                               |  | Carrying 
 Value   |           | Fair 
 Value      |   | Carrying 
 Value |  | Fair 
 Value |          
|Financial Assets:                                            |  |                    |           |                   |   |                  |  |              |           |  |   |           | 
|                                                             |  |                    |           |                   |   |                  |  |              |           |  |   |           | 
|Cash and due
 from banks                                     |  | $                  | 18,485    |                   | $ | 18,485           |  | $            | 15,546    |  | $ | 15,546    | 
|Interest-bearing
 deposits in financial institutions         |  |                    | 42,789    |                   |   | 42,789           |  |              | 55,527    |  |   | 55,527    | 
|Investment
 securities                                       |  |                    | 244,411   |                   |   | 244,965          |  |              | 301,267   |  |   | 301,805   | 
|Loans, net,
 including loans held for sale                   |  |                    | 710,309   |                   |   | 714,443          |  |              | 789,295   |  |   | 793,674   | 
|Accrued
 interest receivable                                 |  |                    | 7,952     |                   |   | 7,952            |  |              | 9,267     |  |   | 9,267     | 
|Total financial assets                                       |  | $                  | 1,023,946 |                   | $ | 1,028,634        |  | $            | 1,170,902 |  | $ | 1,175,819 | 
|                                                             |  |                    |           |                   |   |                  |  |              |           |  |   |           | 
|Financial Liabilities:                                       |  |                    |           |                   |   |                  |  |              |           |  |   |           | 
|                                                             |  |                    |           |                   |   |                  |  |              |           |  |   |           | 
|Non-interest
 bearing demand deposits                        |  | $                  | 133,023   |                   | $ | 133,023          |  | $            | 136,026   |  | $ | 136,026   | 
|Interest-bearing
 deposits                                   |  |                    | 826,523   |                   |   | 832,251          |  |              | 939,513   |  |   | 945,637   | 
|Borrowings                                                   |  |                    | 73,077    |                   |   | 84,192           |  |              | 104,848   |  |   | 119,301   | 
|Accrued
 interest payable                                    |  |                    | 1,641     |                   |   | 1,641            |  |              | 2,999     |  |   | 2,999     | 
|Total financial liabilities                                  |  | $                  | 1,034,264 |                   | $ | 1,051,107        |  | $            | 1,183,386 |  | $ | 1,203,963 | 
|                                                             |  |                    |           |                   |   |                  |  |              |           |  |   |           | 
|Unrecognized
 financial instruments (net of contract amount) |  |                    |           |                   |   |                  |  |              |           |  |   |           | 
|                                                             |  |                    |           |                   |   |                  |  |              |           |  |   |           | 
|Commitments
 to originate loans                              |  | $                  |          |                   | $ |                 |  | $            |          |  | $ |          | 
|Lines of
 credit                                             |  |                    |          |                   |   |                 |  |              |          |  |   |          | 
|Letters of
 credit                                           |  |                    |          |                   |   |                 |  |              |          |  |   |          | 

Financial
instruments actively traded in a secondary market have been valued using quoted
available market prices. Cash and due from banks, interest-bearing time
deposits in other banks, federal funds sold, loans held-for-sale and interest
receivable are valued at book value, which approximates fair value.

Financial
liability instruments with stated maturities have been valued using a present
value discounted cash flow analysis with a discount rate approximating current
market for similar liabilities. Interest payable is valued at book value, which
approximates fair value.

Financial
instrument liabilities with no stated maturities have an estimated fair value
equal to both the amount payable on demand and the recorded book balance.

The
net loan portfolio has been valued using a present value discounted cash flow.
The discount rate used in these calculations is the current rate at which
similar loans would be made to borrowers with similar credit ratings, same
remaining maturities, and assumed prepayment risk.

The
fair value of commitments to originate loans is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The fair values of letters of credit and lines of credit are based on fees
currently charged for similar agreements or on the estimated cost to terminate
or otherwise settle the obligations with the counterparties at the reporting
date.

Changes
in assumptions or estimation methodologies may have a material effect on these
estimated fair values.

17

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The
Corporations remaining assets and liabilities, which are not considered
financial instruments, have not been valued differently than has been customary
with historical cost accounting. No disclosure of the relationship value of the
Corporations core deposit base is required by ASC 825.

Fair
value estimates are based on existing balance sheet financial instruments,
without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
For example, the subsidiary bank has a large fiduciary services department that
contributes net fee income annually. The fiduciary services department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the mortgage banking
operation, brokerage network, deferred taxes, premises and equipment, and
goodwill. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.

Management
believes that reasonable comparability between financial institutions may not
be likely, due to the wide range of permitted valuation techniques and numerous
estimates which must be made, given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
also introduces a greater degree of subjectivity to these estimated fair
values.

NOTE 10  INCOME TAXES

A
reconciliation of income tax expense at 34 percent of pre-tax income to the
Corporations actual tax expense (benefit) for the three and nine-month periods
ended September 30 are shown below:

|                                                     |  |                                   |        |                                  |   |      |   |      |        |   |   |        |  
|---------------------------------------------------- |  | --------------------------------- | ------ | -------------------------------- | - | ---- | - | ---- | ------ | - | - | ------ | -
|(in thousands)                                       |  |                                   |        |                                  |  
|                                                     |  | Three Months Ended
 September 30, |        | Nine Months Ended
 September 30, |  
|                                                     |  | 2010                              |        | 2009                             |   | 2010 |   | 2009 |       
|Computed expected tax
 (benefit) expense           |  | $                                 | (1,265 | )                                | $ | 83   |   | $    | (1,533 | ) | $ | 1,182  |  
|                                                     |  |                                   |        |                                  |   |      |   |      |        |   |   |        |  
|Increase (decrease) in
 income taxes resulting from: |  |                                   |        |                                  |   |      |   |      |        |   |   |        |  
|Tax-exempt income                                    |  |                                   | (464   | )                                |   | (483 | ) |      | (1,388 | ) |   | (1,297 | )
|State income tax, net of federal tax effect          |  |                                   | (53    | )                                |   | (24  | ) |      | (157   | ) |   | 133    |  
|Bank-owned life insurance income                     |  |                                   | (77    | )                                |   | (80  | ) |      | (236   | ) |   | (245   | )
|Other, net                                           |  |                                   | (154   | )                                |   | (12  | ) |      | (166   | ) |   | (111   | )
|Actual tax benefit                                   |  | $                                 | (2,013 | )                                | $ | (516 | ) | $    | (3,480 | ) | $ | (338   | )

NOTE 11  IMPACT OF NEW ACCOUNTING STANDARDS

In
July 2010, the FASB issued ASU No. 2010-20, Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses, which will require the Corporation to provide a greater
level of disaggregated information about the credit quality of the
Corporations loans and leases and the Allowance for Loan Losses (the
Allowance). This ASU will also require the Corporation to disclose additional
information related to credit quality indicators, past due information, and
information related to loans modified in a troubled debt restructuring. The
provisions of this ASU are effective for the Corporations reporting period
ending December 31, 2010. As this ASU amends only the disclosure requirements
for loans and leases and the Allowance, the adoption will have no impact on the
Corporations statements of income and condition.

18

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NOTE 12  REGULATORY MATTERS

On
March 15, 2010, Citizens First National Bank, Princeton, Illinois (the Bank),
a subsidiary of Princeton National Bancorp, Inc. (the Corporation) entered
into a formal written agreement (the Agreement) with the Comptroller of
the Currency (the Comptroller) that contains provisions to lower
nonperforming loan levels and foster improvement in the Banks policies and
procedures with respect to the Banks allowance for loan and lease losses, and
loan risk rating system. The Bank has begun addressing all of these
requirements.

Pursuant
to the Agreement, the Banks board is required to review the adequacy of the
Banks allowance for loan and lease losses and to establish a program for the
maintenance of an adequate allowance. A copy of the boards program is required
to be submitted to the Comptroller for review. The Bank is also required to
take immediate action to protect its interest in criticized assets identified
in the Banks most recent Report of Examination with the Comptroller and to
adopt individual written workout plans with respect to such assets. A copy of
the workout plans is required to be submitted to the Comptroller with respect
to any criticized asset equal to or exceeding $100,000. The Bank is prohibited
from extending any additional credit to any borrower whose loan is criticized,
unless a majority of the Banks board (or appropriate committee) has determined
that the extension is necessary to promote the best interests of the Bank and
such determination is properly recorded. Under the Agreement, the board must
ensure that the Banks internal ratings of credit relationships are timely,
accurate, and consistent with the regulatory credit classification criteria set
forth in the Comptrollers Handbook and related authority. The board must also
ensure that any loan relationship with a high probability of payment default or
other well-defined weakness is rated no better than substandard, regardless
of the existence of certain mitigants that reduce credit risk.

The
Banks board and management have taken relevant actions to comply with the
terms of this Agreement, including the implementation of remediation steps to
protect its interest in criticized assets, enhanced workout plans among other
steps.

19

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PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY 
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three and nine month periods ended September 30, 2010 and 2009

The
following discussion provides information about Princeton National Bancorp,
Inc.s (PNBC or the Corporation) financial condition and results of
operations for the three and nine month periods ended September 30, 2010 and
2009. This discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto. This report contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the Exchange Act), such as discussions of the
Corporations pricing and fee trends, credit quality and outlook, liquidity,
new business results, expansion plans, anticipated expenses and planned
schedules. The Corporation intends such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995, and is including this
statement for purposes of these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe future plans,
strategies and expectations of the Corporation, are identified by use of the
words believe, expect, intend, anticipate, estimate, project, or
similar expressions. Actual results could differ materially from the results
indicated by these statements because the realization of those results is
subject to many risks and uncertainties including: the effect of the current
severe disruption in financial markets and the United States government
programs introduced to restore stability and liquidity, changes in interest
rates, general economic conditions and the weakening state of the United States
economy, legislative/regulatory changes, monetary and fiscal policies of the U.S.
government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporations market area and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including a discussion of these and additional factors that could materially
affect the Corporations financial results, is included in the Corporations
2009 Annual Report on Form 10-K under the headings Item 1. Business and Item
1A. Risk Factors.

CRITICAL ACCOUNTING POLICIES AND USE OF SIGNIFICANT ESTIMATES

The
Corporation has established various accounting policies that govern the
application of U.S. generally accepted accounting principles in the preparation
of the Corporations financial statements. The significant accounting policies
of the Corporation are described in the footnotes to the consolidated financial
statements. Certain accounting policies involve significant judgments and
assumptions by management that have a material impact on the carrying value of
certain assets and liabilities; management considers such accounting policies
to be critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
these judgments and assumptions, which could have a material impact on the carrying
values of assets and liabilities and the results of operations of the
Corporation.

Allowance for Loan Losses

The
Corporation believes the allowance for loan losses is the critical accounting
policy that requires the most significant judgments and assumptions used in the
preparation of its consolidated financial statements. We determine probable
incurred losses inherent in our loan portfolio and establish an allowance for
those losses by considering factors including historical loss rates, expected
cash flows and estimated collateral values. In assessing these factors, we use
organizational history and experience with credit decisions and related
outcomes. The allowance for loan losses represents our best estimate of losses
inherent in the existing loan portfolio. The allowance for loan losses is
increased by the provision for loan losses charged to expense and reduced by
loans charged off, net of recoveries. We evaluate our allowance for loan losses
monthly. If our underlying assumptions later prove to be inaccurate based on
subsequent loss evaluations, the allowance for loan losses is adjusted.

We
estimate the appropriate level of allowance for loan losses by separately
evaluating impaired and non-impaired loans. A specific allowance is assigned to
an impaired loan when expected cash flows or collateral do not justify the
carrying amount of the loan. The methodology used to assign an allowance to a
non-impaired loan is more subjective. Generally, the allowance assigned to
non-impaired loans is determined by applying historical loss rates to existing
loans with similar risk characteristics, adjusted for qualitative factors
including the volume and severity of identified classified loans, changes in
economic conditions, changes in credit policies or underwriting standards, and
changes in the level of credit risk associated with specific industries and
markets. Because the economic and business climate in any given industry
or market, and its impact on any given borrower, can change rapidly, the risk
profile of the loan portfolio is continually assessed and adjusted when
appropriate. Notwithstanding these procedures, there still exists the
possibility that our assessment could prove to be significantly incorrect and
that an immediate adjustment to the allowance for loan losses would be
required.

20

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Other Real Estate Owned

Other
real estate owned acquired through loan foreclosure is initially recorded at
fair value less estimated selling costs when acquired, establishing a new cost
basis. The adjustment at the time of foreclosure is recorded through the
allowance for loan losses. Due to the subjective nature of establishing the
fair value when the asset is acquired, the actual fair value of the other real
estate owned or foreclosed asset could differ from the original estimate. If it
is determined that fair value declines subsequent to foreclosure, a valuation
allowance is recorded through non-interest expense. Operating costs associated
with the assets after acquisition are also recorded as non-interest expense.
Gains and losses on the disposition of other real estate owned and foreclosed
assets are netted and posted to other non-interest expense.

Deferred Income Tax Assets/Liabilities

A
net deferred income tax asset arises from differences in the dates that items
of income and expense enter into reported income and taxable income. Deferred
tax assets and liabilities are established for these items as they arise. From
an accounting standpoint, deferred tax assets are reviewed to determine if they
are realizable based on the historical level of taxable income, estimates of
future taxable income and the reversals of deferred tax liabilities. In most
cases, the realization of the deferred tax asset is based on future profitability.
If we were to experience net operating losses for tax purposes in a future
period, the realization of our deferred tax assets would be evaluated for a
potential valuation reserve.

Additionally,
the Corporation reviews its uncertain tax positions annually under ASC 740-10.
An uncertain tax position is recognized as a benefit only if it is more likely
than not that the tax position would be sustained in a tax examination, with a
tax examination being presumed to occur. The amount actually recognized is the
largest amount of tax benefit that is greater than 50% likely to be recognized
on examination. For tax positions not meeting the more likely than not test,
no tax benefit is recorded. A significant amount of judgment is applied to determine
both whether the tax position meets the more likely than not test as well as
to determine the largest amount of tax benefit that is greater than 50% likely
to be recognized. Differences between the position taken by management and that
of taxing authorities could result in a reduction of a tax benefit or increase
to tax liability, which could adversely affect future income tax expense.

Impairment of Intangible Assets

Core
deposit and customer relationships, which are intangible assets with a finite
life, are recorded on our balance sheets. These intangible assets were
capitalized as a result of past acquisitions and are being amortized over their
estimated useful lives of up to 15 years. Core deposit intangible assets, with
finite lives will be tested for impairment when changes in events or
circumstances indicate that its carrying amount may not be recoverable. Core
deposit intangible assets were tested for impairment during 2010 and no
impairment was recognized.

Mortgaging Service Rights (MSRs)

MSR
fair values are very sensitive to movements in interest rates as expected
future net servicing income depends on the projected outstanding principal
balances of the underlying loans, which can be greatly reduced by prepayments.
Prepayments usually increase when mortgage interest rates decline and decrease
when mortgage interest rates rise. For discussion regarding the impairment of
MSRs, see Note 4  Originated Mortgage Servicing Rights in the Notes to
Consolidated Financial Statements.

Fair Value Measurements

ASC
820 defines the fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC 820 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.

In
accordance with ASC 820, the Corporation groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value. These levels are:

| |         |                                                                                                                                                                                                                                                   
| | ------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Level 1 | Valuations
 for assets and liabilities traded in active exchange markets, such as the New
 York Stock Exchange. Valuations are obtained from readily available pricing
 sources for market transactions involving identical assets or liabilities.

21

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| |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Level 2 | Valuations
 for assets and liabilities traded in less active dealer or broker markets.
 Valuations are obtained from third party pricing services for identical or
 comparable assets or liabilities which use observable inputs other than Level
 1 prices, such as quoted prices for similar assets or liabilities; quoted
 prices in markets that are not active; or other inputs that are observable or
 can be corroborated by observable market data for substantially the full term
 of the assets and liabilities.
| |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Level 3 | Unobservable
 inputs that are supported by little or no market activity and that are
 significant to the fair value of the assets or liabilities. Financial
 Accounting Standards Board Accounting Standards Codification 820 (ASC 820),
 Fair Value Measurements. ASC 820 defines fair value, establishes a
 framework for measuring fair value and expands disclosures about fair value
 measurements. ASC 820 has been applied prospectively as of the beginning of
 the period.                                     

At
the end of each quarter, the Corporation assesses the valuation hierarchy for
each asset or liability measured. From time to time, assets or liabilities may
be transferred within hierarchy levels due to changes in availability of
observable market inputs to measure fair value at the measurement date.
Transfers into or out of hierarchy levels are based upon the fair value at the
beginning of the reporting period. A more detailed description of the fair
values measured at each level of the fair value hierarchy can be found in Note
9  Fair Value of Assets and Liabilities in the Notes to Consolidated
Financial Statements.

RECENT DEVELOPMENTS

Effective
as of March 15, 2010, Citizens First National Bank, entered into a formal
written agreement (the Agreement) with the Office of the Comptroller of the
Currency (the Comptroller) that contains provisions to lower nonperforming
loan levels and foster improvement in the Banks policies and procedures with
respect to the Banks allowance for loan and lease losses and loan risk rating
system. The Bank has addressed all of these requirements.

Pursuant
to the Agreement, the Banks board is required to review the adequacy of the
Banks allowance for loan and lease losses and to establish a program for the
maintenance of an adequate allowance. A copy of the boards program is required
to be submitted to the Comptroller for review. The program has been completed
and is reviewed quarterly by the Banks Board of Directors in order to verify
management is maintaining an adequate allowance.

The
Bank is also required to take immediate action to protect its interest in
criticized assets identified in the Banks most recent Report of Examination
with the Comptroller and to adopt individual written workout plans with respect
to such assets. A copy of the workout plans is required to be submitted to the
Comptroller with respect to any criticized asset equal to or exceeding
$100,000. The Bank adopted individual quarterly workout plans for all
criticized assets equal to or exceeding $100,000 as of September 30, 2010 and
sent them to the Comptroller in October. Additionally, the Bank is prohibited
from extending any additional credit to any borrower whose loan is criticized,
unless a majority of the Banks board (or appropriate committee) has determined
that the extension is necessary to promote the best interests of the Bank and
such determination is properly recorded.

Under
the Agreement, the board must also ensure that the Banks internal ratings of
credit relationships are timely, accurate, and consistent with the regulatory
credit classification criteria set forth in the Comptrollers Handbook and
related authority. The board must also ensure that any loan relationship with a
high probability of payment default or other well-defined weakness is rated no
better than substandard, regardless of the existence of certain other
mitigants that could reduce credit risk. The internal loan review staff has
been expanded, as has the scope of their loan reviews. Considerable progress
has been made in meeting the loan review scope and evaluating and verifying
internal loan ratings in a timely, accurate and consistent basis with credit
classification criteria set forth in the Comptrollers Handbook. The Board of
Directors Loan Committee has directed risk management to refine its loan
review methodology in grading to ensure that loans with a probability of
payment default or well-defined weaknesses are graded substandard regardless of
mitigating controls which might reduce credit risk. The Directors Loan
Committee monitors this process with bi-monthly meetings and reviews loan
review reports to ensure compliance with the terms of the Agreement.

22

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RESULTS OF OPERATIONS

The
Corporation incurred a net loss for the third quarter of 2010 of ($1,911,000),
as compared to net income of $760,000 in the third quarter of 2009. The net
loss available to common stockholders for the third quarter of 2010 was
($2,232,000), as compared to net income available to common stockholders of
$440,000 for the third quarter of 2009. For the
third quarter of 2010, basic and diluted loss per common share available to
common stockholders was ($0.67), as compared to earnings of $0.13 for both
basic and diluted share in the third quarter of 2009. The decrease in earnings
for the third quarter of 2010 as compared to the third quarter of 2009 is the
result of an increase of $4.3 million recorded in loan loss provision expense
(please refer to the Asset Quality and Allowance for Loan Loss sections below
for more detail). The net income (loss) available to common stockholders to
average assets was (0.79%) and 0.14% for the third quarters of 2010 and 2009,
respectively. The net income (loss) available to common stockholders to average
stockholder equity was (11.28%) and 1.75% for the third quarters of 2010 and 2009,
respectively.

The
Corporation incurred a net loss for the first nine months of 2010 of
($1,232,000), as compared to net income of $3,815,000 for the first nine months
of 2009. The net loss available to common stockholders for the first nine
months of 2010 was ($2,194,000), as compared to net income of $2,929,000 for
the first nine months of 2009. For the first nine months of 2010 basic and
diluted loss per common share available to common stockholders was ($0.66), as
compared to earnings of $0.89 for both basic and diluted share in the first
nine months of 2009. The decrease in earnings for the first nine months of 2010
as compared to the first nine months of 2009 is attributed to a $8.3 million
increase in loan loss provisions, a $527,000 decrease in mortgage banking
income and a $746,000 increase in other real estate expenses. These negative
events were partially offset by an increase of $2.0 million in net interest
income. The net income (loss) available to common stockholders to average assets
was (0.25%) and 0.32% for the first nine months of 2010 and 2009, respectively.
The net income (loss) available to common stockholders to average stockholder
equity was (3.80%) and 4.07% for the first nine months of 2010 and 2009,
respectively.

Net
interest income before the provision for loan losses was $9,245,000 for the
third quarter of 2010, as compared to $8,883,000 for the third quarter of 2009,
respectively. This $362,000 (or 4.1%) increase was driven by lower rates
resulting in a lower cost of funds. Accordingly, the net interest margin on
average interest-earning assets increased to 4.14% in the third quarter of 2010
compared to 3.40% in the third quarter of 2009.

Net
interest income before the provision for losses was $27.9 million for the first
nine months of 2010, as compared to $25.9 million for the first nine months of
2009, respectively. This $2.006 million (or 7.7%) increase was driven by
reductions in interest expenses from the lower cost of deposits and borrowings.
The net interest margin on average interest-earning assets increased to 4.00%
in the first three quarters of 2010 compared to 3.45% in the third quarter of
2009. For the first nine months of 2010, the cost of interest-bearing
liabilities declined 87 basis points to 1.39%.

The
Corporations provision for loan loss expense recorded each quarter is
determined by managements evaluation of the risk characteristics of the loan
portfolio, as well as an evaluation of specific reserves on impaired credits.
For the third quarter of 2010, the provision for loan losses increased to
$6,725,000 (or 179.0%) from $2,410,000 for the third quarter of 2009. Net
charge-offs increased to $4,147,000 in the third quarter of 2010 (by $3.3
million or 412.1%) compared to $810,000 for the third quarter of 2009. Net
charge-offs increased in the first nine months of 2010 by $4.5 million (or
192.4%) to $6,822,000 compared to $2,350,000 for the first nine months of 2009.
Annualized net loans charged-off to average loans for the first three quarters
of 2010 was 1.21% compared to 0.40% in the first three quarters of 2009. Asset
quality and the allowance for loan losses are discussed more fully in the
sections below.

Non-interest
income totaled $2,474,000 for the third quarter of 2010, as compared to
$2,772,000 for the third quarter of 2009 (a decrease of $298,000 or 10.8%). The
decrease is primarily the result of an impairment of $333,000 on mortgage
servicing rights and a decrease in service charges on deposit accounts of
$46,000, primarily a result of a lower number of consumer overdrafts.
Offsetting these was an improvement in mortgage banking income of $196,000 over
the comparable periods due to increased re-financing activity from the lower
interest rate environment. Non-interest income to average assets for the third
quarters of 2010 and 2009 was 0.87% and 0.86%, respectively.

Non-interest
income totaled $7,695,000 for the first nine months of 2010, as compared to
$9,092,000 for the first nine months of 2009. This decline of $1,397,000 (or
15.4%) is primarily attributed to a $527,000 decrease in mortgage banking
income from fewer loans closed, a $366,000 increase in the amount of mortgage
servicing right impairment, a $154,000 decrease in trust and farm management
fees from a lower total of assets under management, and a $151,000 decline in
service charges on deposit accounts from a 12% reduction in the amount of
consumer overdrafts. Non-interest income to average assets for the first nine
months of 2010 was 0.92%, compared to 0.88% for the first nine months of 2009.

Total
non-interest expense for the third quarter of 2010 was $9,047,000, as compared
to $9,001,000 for the first nine months of 2009, representing a marginal
increase of $46,000 (or 0.5%). Total non-interest expenses to average assets
for the third quarter of 2010 was 3.19% compared to 2.80% for the third quarter
of 2009.

23

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Total
non-interest expense for the first nine months of 2010 was $27,149,000, as
compared to $26,477,000 for the first nine months of 2009. This increase of
$672,000 (or 2.5%) is attributed to a $746,000 rise in other real estate
expenses. Additionally, loan collection expenses increased by $167,000 (or
51.4%) and the Corporation also recorded a $110,000 write-down from the
appraisal of the land held-for-sale in Elburn. Collectively, all other
categories of non-interest expense decreased by $351,000. Total non-interest
expense to average assets for the first nine months of 2010 and 2009 was 3.11%
and 2.86%, respectively.

INCOME TAXES

The
Corporation recorded an income tax benefit of $2,142,000 for the third quarter
of 2010, as compared to an income tax benefit of $516,000 for the third quarter
of 2009. The effective tax rate was (52.8%) for the third quarter of 2010, as
compared to (211.5%) for the third quarter of 2009. For the first nine months
of 2010, the Corporation recorded an income tax benefit of $3,609,000, as
compared to an income tax benefit of $338,000 for the first nine months of
2009. The income tax benefit in 2010 is due to a pre-tax loss coupled with the
effect of tax-exempt investment interest income. For more information on the
Corporations income taxes see Note 10  Income Taxes in the Notes to
Consolidated Financial Statements.

FDIC

On
September 29, 2009, the Board of Directors of the FDIC adopted a Notice of
Proposed Rulemaking (NPR) that would require insured institutions to prepay
their estimated quarterly risk-based assessments for the fourth quarter of 2009
and for all of 2010, 2011 and 2012. The FDIC estimated that the total prepaid
assessments collected would be approximately $45 billion. The FDIC Board also
voted to adopt a uniform three-basis point increase in assessment rates
effective on January 1, 2011, and extend the restoration period from seven to
eight years.

Under GAAP
accounting rules, unlike special assessments, prepaid assessments would not
immediately affect bank earnings. Each institution would record the entire
amount of its assessment related to future periods as a prepaid expense (an
asset) as of December 31, 2009, the date the payment would be made. The
Corporation paid an assessment of $6,763,000 for the fourth quarter of 2009 and
for all of 2010, 2011 and 2012.

Beginning
January 1, 2010, and each quarter thereafter, each institution would record an
expense (charge to earnings) for its regular quarterly assessment and an
offsetting credit to the prepaid assessment until the asset is exhausted. At
September 30, 2010, the Corporation had a remaining prepaid assessment of
$4,796,000. This amount is reflected in the category of Other Assets in the
Consolidated Balance Sheets. The Corporation recorded $603,000 of federal
insurance assessment expense for the third quarter of 2010 and $1.8 million for
the first nine months of 2010.

ANALYSIS OF FINANCIAL CONDITION

Total assets decreased to $1.111 billion at September 30, 2010 from
$1.261 billion at December 31, 2009. This is part of the Companys continued
plan in 2010 to right size the balance sheet in proportion to capital. Total
loans decreased to $727.8 million from $798.1 million (a decrease of $70.3
million or 8.8%). Investment securities decreased to $244.4 million from $301.3
million (a decrease of $56.9 million or 18.8%), as part of managements overall
asset/liability management plan to reduce total assets. Other real estate owned
increased marginally to $18.4 million from $17.7 million (increase of $714,000
or 4.0%) at December 31, 2009. However, the balance of other real estate owned
decreased by $1,329,000 from June 30, 2010.

Total
deposits decreased to $959.5 million at September 30, 2010 from $1.076 billion
at December 31, 2009. Time deposits have decreased to $386.0 million from
$496.6 million (a decrease of $110.6 million or 22.3%). Demand deposits have
decreased to $133.0 million from $136.0 million (a decrease of $3.0 million or
2.2%). Interest-bearing deposits decreased to $368.3 million from $374.6
million (a decrease of $6.3 million or 1.7%). Savings deposits have increased
to $72.2 million from $68.3 million (an increase of $3.9 million or 5.7%).
Deposit pricing reductions have resulted in decreases in preferred time
deposits (public funds) and other time deposits with some funds flowing into
other interest-bearing deposit products. The Corporation has no wholesale
brokered CDs, but does offer its depositors access to the CDARS program. The
CDARS deposits are considered for regulatory reporting purposes to be brokered
CDs. CDARS is a network of financial institutions that provides for increased
FDIC coverage. (For example, when you place a large deposit with a CDARS
Network member, that institution uses the CDARS service to place your funds
into CDs issued by other members of the CDARS Network. This occurs in increments below the
standard FDIC insurance maximum so that both principal and interest are
eligible for FDIC insurance.) The Corporation had $22.7 million of CDARS
deposits at September 30, 2010, compared to $43.8 million at December 31, 2009.

24

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Total
borrowings decreased to $73.1 million at September 30, 2010 from $104.8 million
at December 31, 2009. Customer repurchase agreements have decreased to $31.3
million from $47.3 million (a decrease of $16.0 million or 33.9%). Advances
from the Federal Home Loan Bank have decreased to $16.0 million from $31.5
million (a decrease of $15.5 million or 49.2%). The maturing advances had
interest rates between 2.00% and 3.60% which, by not being renewed, has helped
to improve the Corporations net interest margin.

CAPITAL PURCHASE PROGRAM

On January
23, 2009, the Corporation received $25,083,000 of equity capital by issuing to
the United States Department of Treasury 25,083 shares of the Corporations
5.00% Series B Fixed Rate Cumulative Perpetual Preferred Stock, no par value,
with a liquidation preference of $1,000 per share and a ten-year warrant to
purchase up to 155,025 shares of the Corporations common stock, par value
$5.00 per share, at an exercise price of $24.27 per share. The proceeds
received were allocated to the preferred stock and common stock warrants based
on their relative fair values. The resulting discount on the preferred stock is
amortized against retained earnings and is reflected in the Corporations
consolidated statement of income as Preferred stock dividends, resulting in
additional dilution to the Corporations earnings per common share. The warrants
are immediately exercisable, in whole or in part, over a term of 10 years. The
warrants were included in the Corporations diluted average common shares
outstanding (subject to anti-dilution). Both the preferred securities and
warrants were accounted for as additions to the Corporations regulatory Tier 1
and total capital.

The Series
B Preferred stock is not mandatorily redeemable and will pay cumulative
dividends at a rate of 5% per year for the first five years and 9% per year
thereafter. Any redemption requires Federal Reserve approval. The Series B
Perpetual Preferred stock ranks senior to the Corporations existing authorized
Series A Junior Participating Preferred stock.

A company
that participates must adopt certain standards for executive compensation,
including (a) prohibiting golden parachute payments as defined in the
Emergency Economic Stabilization Act of 2008 (EESA) to senior Executive
Officers; (b) requiring recovery of any compensation paid to senior Executive
Officers based on criteria that is later proven to be materially inaccurate;
(c) prohibiting incentive compensation that encourages unnecessary and
excessive risks that threaten the value of the financial institution; and (d)
accepting restrictions on the payment of dividends and the repurchase of common
stock.

LOANS

The
Corporations loan portfolio largely reflects the profile of the communities in
which it operates. The Corporation essentially offers four types of loans:
agricultural, commercial, real estate and consumer installment. The Corporation
has no foreign loans. The following table summarizes the Corporations loan
portfolio excluding loans held-for-sale:

|                      |  |                    |           |                   |  |        |   |            |           |        |  |            |   |    |         |   |  |       |   
|--------------------- |  | ------------------ | --------- | ----------------- |  | ------ | - | ---------- | --------- | ------ |  | ---------- | - | -- | ------- | - |  | ----- | --
|(in thousands)        |  | September 30, 2010 |           | December 31, 2009 |  | Change |  
|                      |  | Amount             |           | % of Total        |  | Amount |   | % of Total |           | Amount |  | Percentage |  
|                      |  |                    |           |                   |  |        |   |            |           |        |  |            |   |    |         |   |  |       |   
|Agricultural          |  | $                  | 71,738    |                   |  | 9.9    | % | $          | 76,918    |        |  | 9.6        | % | ($ | 5,180   | ) |  | (6.7  | )%
|Commercial (1)        |  |                    | 139,876   |                   |  | 19.2   |   |            | 244,049   |        |  | 30.6       |   | ($ | 104,173 | ) |  | (42.7 | ) 
|Real Estate:          |  |                    |           |                   |  |        |   |            |           |        |  |            |   |    |         |   |  |       |   
|1-4 family residences |  |                    | 95,936    |                   |  | 13.2   |   |            | 123,374   |        |  | 15.4       |   |    | (27,438 | ) |  | (22.2 | ) 
|Agricultural          |  |                    | 45,825    |                   |  | 6.3    |   |            | 61,022    |        |  | 7.6        |   |    | (15,197 | ) |  | (24.9 | ) 
|Construction (1)      |  |                    | 105,830   |                   |  | 14.5   |   |            | 24,118    |        |  | 3.0        |   |    | 81,712  |   |  | 338.8 |   
|Commercial            |  |                    | 206,316   |                   |  | 28.3   |   |            | 198,914   |        |  | 24.9       |   |    | 7,402   |   |  | 3.7   |   
|Total Real Estate     |  |                    | 453,907   |                   |  | 62.3   |   |            | 407,428   |        |  | 51.1       |   |    | 46,479  |   |  | 11.4  |   
|Installment           |  |                    | 62,253    |                   |  | 8.6    |   |            | 69,679    |        |  | 8.7        |   |    | (7,426  | ) |  | (10.7 | ) 
|Total loans           |  | $                  | 727,774   |                   |  | 100.0  | % | $          | 798,074   |        |  | 100.0      | % | ($ | 70,300  | ) |  | (8.8  | )%
|Total assets          |  | $                  | 1,111,840 |                   |  |        |   | $          | 1,260,730 |        |  |            |   |    |         |   |  |       |   
|Loans to total assets |  |                    |           |                   |  | 65.5   | % |            |           |        |  | 63.3       | % |    |         |   |  |       |   

|    |                                                                                    | 
|--- | ---------------------------------------------------------------------------------- | 
|   
|    |                                                                                   
|(1) | Loans previously classified
 as commercial have been reclassified as construction.

25

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Total loans
decreased to $727.8 million from $798.1 million (a decrease of $70.3 million or
8.8%), as part of managements overall asset/liability management plan to
increase liquidity and reduce assets. The Corporation continues to work with
borrowers to resolve problem loan situations. Commercial and total real estate
loan figures were affected by a call report reclassification review of the loan
portfolio. Commercial loans declined at September 30, 2010 to $139.9 million (a
decrease of $104.2 million or 42.7%) largely due to the reclassification
review. Construction loans increased at September 30, 2010 to $105.8 million
(an increase of $81.7 million or 338.8%) largely due to the reclassification
review. 1-4 family loans declined to $95.9 million (a decrease of 27.4 million
or 22.2%) due to loan repayments including prepayments and customers
refinancing elsewhere. Loans to total assets at September 30, 2010 compared to
December 31, 2009 increased to 65.5% from 63.3%, despite the loan portfolio
decline of $70.3 million (resulting from loan payoffs and pay downs with little
demand for new loans).

ASSET QUALITY

For the
first nine months of 2010, the subsidiary bank charged off $6,982,000 of loans
and had recoveries of $160,000, compared to charge-offs of $2,507,000 and
recoveries of $157,000 during the first nine months of 2009. A detailed
breakdown of the types of loan charge-offs and recoveries can be found in the
table in the allowance for loan losses section.

Non-performing
loans increased to $82.7 million or 11.4% of loans at September 30, 2010, as
compared to $58.6 million or 7.3% of loans at December 31, 2009. Loans are
considered non-performing once the loan has become past due 90 days or more, is
placed on non-accrual or is a troubled debt restructuring. Once the loan is
deemed a non-performing loan, the loan officer begins completing a Problem
Asset Workout Summary. These are prepared on a quarterly basis. This includes a
review of the collateral. If the estimated current collateral value is in
significant excess of the outstanding debt, a new appraisal is not ordered. If
the collateral value is not in significant excess of the outstanding debt, the
loan officer will determine if a new appraisal should be ordered based on their
knowledge of the current market in the collaterals area. Once the Company
determines that full collection of the principal of the debt owed is not
likely, the Company will order new appraisals. If the estimated fair value
represented in the new appraisal is less than the outstanding debt, a
charge-off is recorded equal to the difference between the discounted
collateral value and the outstanding debt. The determination of a specific
reserve or charge-off is reviewed on a monthly basis by the Company. At
September 30, 2010 non-accrual loans were $73.7 million compared to $42.6
million at December 31, 2009. The total amount of loans ninety days or more
past due and still accruing interest at September 30, 2010 was $1,438,000
compared to $2,087,000 at December 31, 2009.

In regard
to restructured loans, when a loan is restructured, the Loan Officer is
required to document the basis for the restructure, obtain current and complete
credit and cash flow information and identify a specific repayment plan that
would retire the debt. This information is provided to the Credit Analyst
department which prepares a thorough credit presentation. The credit
presentation includes the modified terms of the loan, a collateral analysis and
a cash flow analysis based on the modified terms of the loan. The credit
presentation is presented to the Directors Loan Committee for approval. At the
time a loan is restructured, the Company considers the repayment history of the
loan and the value of the collateral. If the principal or interest is due and
had remained unpaid for 90 days or more and the loan is not well-secured, the
loan is placed on nonaccrual status. If the principal and interest payments are
current and the loan is well-secured, the restructured loan continues to accrue
interest. Once a loan is placed on nonaccrual status, the borrower is required
to make current principal and interest payments based on the modified terms for
a period of at least six months before returning the loan to accrual status.

26

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At
September 30, 2010, the Corporation had $8,513,000 of restructured loans
included in the non-accrual line item below. Additionally, the Corporation had
$7,518,000 of loans that were restructured and still accruing interest at
September 30, 2010. Of the $7,518,000, $6,034,000 of these loans are performing
in accordance with the modified terms. The following table provides information
(in thousands) about the Corporations non-performing assets:

|                                      |  |                   |         |                  |   |                   |   |   |        |  
|------------------------------------- |  | ----------------- | ------- | ---------------- | - | ----------------- | - | - | ------ | -
|                                      |  | September 30,2010 |         | December 31,2009 |   | September 30,2009 |  
|                                      |  |                   |         |                  |   |                   |  
|Non-accrual                           |  | $                 | 73,699  |                  | $ | 42,593            |   | $ | 38,143 |  
|90 days past due still accruing       |  |                   | 1,438   |                  |   | 2,087             |   |   | 370    |  
|Restructured                          |  |                   | 7,518   |                  |   | 13,941            |   |   |       |  
|Total non-performing loans            |  | $                 | 82,655  |                  | $ | 58,621            |   | $ | 38,513 |  
|Other real estate owned               |  |                   | 18,372  |                  |   | 17,658            |   |   | 16,182 |  
|Total non-performing assets           |  | $                 | 101,027 |                  | $ | 76,279            |   | $ | 54,695 |  
|                                      |  |                   |         |                  |   |                   |   |   |        |  
|Non-performing loans to total loans   |  |                   | 8.91    | %                |   | 7.35              | % |   | 2.88   | %
|Non-performing assets to total assets |  |                   | 7.59    | %                |   | 6.05              | % |   | 2.96   | %

Impaired
loans totaled $64.4 million, at September 30, 2010 compared to $44.1 million at
December 31, 2009. Of the $64,366,910 in impaired loans, the Corporation relied
on third party appraisals for $62,918,285 of the impaired loans. Of the
$62,918,285, approximately $17.8 million or 28.2% of the impaired loans had
current third party appraisals which were relied upon. These appraisals were
completed within twelve months of September 30, 2010. The appraisals for the
remaining $45.2 million in impaired loans in which third party appraisals were
obtained had not been updated as the fair value in the last appraisal received
and the current estimated value were in significant excess of the outstanding
debt. The average loan to fair value for the $45,166,088 was approximately 55%.
Collateral values which are not based on current appraisals are discounted 10%
to 20% in the collateral evaluation in addition to the already required 10%
discount. The initial 10% discount is due to the anticipated selling costs of
the collateral. The additional discount is based on several factors. These
factors include the loan officers review of the collateral and its current
condition, the Companys knowledge of the current economic environment in the
collaterals market, and the Companys past experience with real estate in the
area. The date of the appraisal is also considered in conjunction with the
economic environment and the decline in the real estate market since the
appraisal was obtained.

For all
impaired loans, the loan officer completes a Problem Asset Workout Summary on a
quarterly basis. This summary includes a review of the collateral. If the
estimated current collateral value is in significant excess of the outstanding
debt, a new appraisal is not ordered. If the collateral value is not in
significant excess of the outstanding debt, the loan officer will determine if
a new appraisal should be ordered based on their knowledge of the current
market in the collaterals area. If the appraisal is more than one year old at
the date of the analysis, the loan officer must consider discounting the
collateral an additional 10% to 20% based on the current market conditions.
This is in addition to the original discount of 10% on the collateral value
when the appraisal is first received. The amount of the discount and the reason
for the discount is documented on the Problem Asset Workout Summary.

There were
charge-offs of $1,220,738 through December 31, 2009 on impaired loans of
$5,678,561 out of the $44,115,796 in total impaired loans as of December 31,
2009. There were specific valuation allowances of $234,360 on these loans of
$5,678,561 at December 31, 2009 and $3,007,217 was charged off on these loans
in 2010 through September 30, 2010. On the total impaired loans of $44,115,796
at December 31, 2009, $4,993,860 has been charged-off in 2010 through September
30, 2010. Therefore, through September 30, 2010, the total amount of
charge-offs on the December 31, 2009 impaired loans was $6,214,598. The
charge-offs were based on the fair values in the most recently obtained third
party appraisals. The fair values in the appraisals on impaired loans were discounted by 10% to
40% to obtain the estimated fair value based on the loan officers review of
the collateral and its current condition, the Companys knowledge of the
current economic environment in the collaterals market, and the Companys past
experience with real estate in the area. The date of the appraisal is also
considered in conjunction with the economic environment and the decline in the
real estate market since the appraisal was obtained. This was in addition to
the 10% discount on the collateral as already required by the Company. The fair
value from the appraisal was discounted to determine a reasonable amount the
Bank would receive in the liquidation of the collateral. The estimated fair
value was then compared to the outstanding loan balance and the difference was
charged-off.

27

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The
Company requires appraisals on real estate if the loan is over $250,000 or if
the collateral is commercial real estate at the time of origination of the
loan. If the appraisal is not within one year of the reporting period, the loan
officer provides an additional discount on the collateral based on the loan
officers review of the collateral and its current condition, the Companys
knowledge of the current economic environment in the collaterals market, and
the Companys past experience with real estate in the area. The date of the
appraisal is also considered in conjunction with the economic environment and
the decline in the real estate market since the appraisal was obtained. This
additional discount is usually 10% to 20%. If the loan is below $250,000 and is
not commercial real estate, an internal valuation of the collateral may be
used, but must be completed by a staff member who has no involvement in the
credit decision. Underlying collateral consisting of vehicles, equipment or
other assets is valued using information provided by the borrower. The loan
officer must confirm the existence of the assets and provide adequate discounts
on the value of the collateral when determining its adequacy to cover the loan.

The
following is the Companys impaired loans with and without valuation reserves
by loan type as of September 30, 2010 and December 31, 2009 (in thousands):

|                                               |  |                            |        |                    |   |       | 
|---------------------------------------------- |  | -------------------------- | ------ | ------------------ | - | ----- | 
|                                               |  | September 30, 2010         |       
|                                               |  | Unpaid
 Principal
 Balance |        | Related
 Allowance |  
|                                              
|Impaired
 loans without a valuation allowance: |  |                            |        |                    |   |       | 
|Commercial                                     |  | $                          | 10,542 |                    | $ |      | 
|Commercial - real estate                       |  |                            | 6,400  |                    |   |      | 
|Commercial - real estate development           |  |                            | 20,648 |                    |   |      | 
|Residential real estate development            |  |                            | 1,497  |                    |   |      | 
|                                               |  |                            | 39,087 |                    |   |      | 
|                                               |  |                            |        |                    |   |       | 
|Impaired loans
 with a valuation allowance:    |  |                            |        |                    |   |       | 
|Commercial                                     |  |                            | 928    |                    |   | 332   | 
|Commercial - real estate                       |  |                            | 2,498  |                    |   | 246   | 
|Commercial - real estate development           |  |                            | 21,084 |                    |   | 4,976 | 
|Residential real estate development            |  |                            | 770    |                    |   | 20    | 
|                                               |  |                            | 25,280 |                    |   | 5,574 | 
|                                               |  |                            |        |                    |   |       | 
|Total:                                         |  |                            |        |                    |   |       | 
|Commercial                                     |  |                            | 11,470 |                    |   | 332   | 
|Commercial - real estate                       |  |                            | 8,898  |                    |   | 246   | 
|Commercial - real estate development           |  |                            | 41,732 |                    |   | 4,976 | 
|Residential real estate development            |  |                            | 2,267  |                    |   | 20    | 
|                                               |  |                            | 64,367 |                    |   | 5,574 | 

28

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|                                               |  |                            |        |                    |   |       | 
|---------------------------------------------- |  | -------------------------- | ------ | ------------------ | - | ----- | 
|                                               |  | December 31, 2009          |       
|                                               |  | Unpaid
 Principal
 Balance |        | Related
 Allowance |  
|                                              
|Impaired
 loans without a valuation allowance: |  |                            |        |                    |   |       | 
|Commercial                                     |  | $                          | 1,861  |                    | $ |      | 
|Commercial - real estate                       |  |                            | 4,927  |                    |   |      | 
|Commercial - real estate development           |  |                            | 16,450 |                    |   |      | 
|Residential real estate development            |  |                            | 6,502  |                    |   |      | 
|                                               |  |                            | 29,740 |                    |   |      | 
|                                               |  |                            |        |                    |   |       | 
|Impaired
 loans with a valuation allowance:    |  |                            |        |                    |   |       | 
|Commercial                                     |  |                            | 859    |                    |   | 325   | 
|Commercial - real estate                       |  |                            |       |                    |   |      | 
|Commercial - real estate development           |  |                            | 10,380 |                    |   | 2,020 | 
|Residential real estate development            |  |                            | 3,137  |                    |   | 560   | 
|                                               |  |                            | 14,376 |                    |   | 2,905 | 
|                                               |  |                            |        |                    |   |       | 
|Total:                                         |  |                            |        |                    |   |       | 
|Commercial                                     |  |                            | 2,720  |                    |   | 325   | 
|Commercial - real estate                       |  |                            | 4,927  |                    |   |      | 
|Commercial - real estate development           |  |                            | 26,830 |                    |   | 2,020 | 
|Residential real estate development            |  |                            | 9,639  |                    |   | 560   | 
|                                               |  | $                          | 44,116 |                    |   | 2,905 | 

ALLOWANCE FOR LOAN LOSSES

The
Companys allowance for loan losses (ALL) has two components. The first
component is based upon individual review of nonperforming, substandard or
other loans identified at a risk for loss and deemed impaired. This includes
nonperforming loans, which consist of nonaccrual loans, loans past due over 90
days and troubled debt restructurings, designated as impaired as defined by
accounting and regulatory guidance, and are evaluated for probable loss on an
individual basis. As of September 30, 2010, the loans with specific valuation
reserves totaled $33.9 million with a reserve of $8.0 million or 43.1% of the
allowance for loan losses balance. As of December 31, 2009, the loans with
specific valuation reserves totaled $12.2 million with a reserve of $4.5
million or 37.0% of the total allowance for loan losses balance.

The
second component is based upon expected but unidentified losses inherent in our
loan portfolio. The second component is determined utilizing the Companys most
recent three year net charge-off history which is then adjusted for qualitative
and quantitative factors. These reserve percentages are reviewed on a quarterly
basis by an Allowance for Loan and Lease Loss Review Committee which is
comprised of members of management, including lending and risk management. The
qualitative and quantitative factors considered include economic conditions,
changes in underwriting practices, changes in the value of collateral, changes
in the portfolio volume, staff experience, past due and nonaccrual loans, loan
review oversight, concentrations of loans and competition. Loans without a
specific valuation allowance of $715.9 and $788.4 million had a reserve of $8.8
and $7.5 million as of September 30, 2010 and December 31, 2009, respectively.
While the balance of the loans decreased, the reserve increased. This was due
to the continued deterioration in the economic environment in which the Company
operates and the increase in the Companys nonperforming loans.

29

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The
allowance for loan losses was 2.55% and 1.51% of total loans as of September
30, 2010 and December 31, 2009, respectively. The annualized net losses as a
percentage of loans were 1.21% as of September 30, 2010, compared to net losses
as a percentage of loans of 0.54% for the year ended December 31, 2009.

While
the allowance for loan losses as a percentage of non-performing loans is low,
the allowance for loan losses is considered adequate based on the monitoring of
the non-performing loans and the Companys actual loss history. The allowance
for loan losses calculation takes into consideration the continuing economic
declines and the increase in the non-performing loans in the quantitative and
qualitative factors used to adjust the reserve percentages on loans not
specifically reserved for in the calculation. The monitoring of the
non-performing loans includes a review of the appraisals and the need for
current appraisals.

The
allowance for possible loan losses shown in this table below represents the
allowance available to absorb losses within the portfolio (in thousands):

|                                                                                               |  |                                         |         |                                |   |         |  
|---------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | ------------------------------ | - | ------- | -
|(in thousands)                                                                                 |  | Nine Months
 Ended
 September 30,
 2010 |         | Year Ended
 December 31,
 2009 |  
|                                                                                               |  |                                         |         |                                |   |         |  
|Amount of loans outstanding
 at end of period (net of unearned interest)                       |  | $                                       | 727,774 |                                | $ | 798,074 |  
|Average amount of loans
 outstanding for the period (net of unearned interest)                 |  | $                                       | 756,301 |                                | $ | 743,877 |  
|Allowance for possible loan
 losses at beginning of the period                                 |  | $                                       | 12,075  |                                | $ | 5,064   |  
|Charge-offs:                                                                                   |  |                                         |         |                                |   |         |  
|Agricultural                                                                                   |  |                                         | 0       |                                |   | 21      |  
|Agricultural real estate                                                                       |  |                                         | 68      |                                |   | 0       |  
|Commercial                                                                                     |  |                                         | 905     |                                |   | 1,253   |  
|Commercial real estate                                                                         |  |                                         | 590     |                                |   | 236     |  
|Commercial real estate construction                                                            |  |                                         | 4,493   |                                |   | 1,263   |  
|Residential real estate                                                                        |  |                                         | 616     |                                |   | 275     |  
|Home equity                                                                                    |  |                                         | 54      |                                |   | 0       |  
|Installment                                                                                    |  |                                         | 256     |                                |   | 1,208   |  
|Total charge-offs                                                                              |  |                                         | 6,982   |                                |   | 4,256   |  
|Recoveries:                                                                                    |  |                                         |         |                                |   |         |  
|Agricultural                                                                                   |  |                                         | 0       |                                |   | 0       |  
|Agricultural real estate                                                                       |  |                                         | 0       |                                |   | 0       |  
|Commercial                                                                                     |  |                                         | 40      |                                |   | 27      |  
|Commercial real estate                                                                         |  |                                         | 0       |                                |   | 0       |  
|Commercial real estate construction                                                            |  |                                         | 0       |                                |   | 15      |  
|Residential real estate                                                                        |  |                                         | 0       |                                |   | 0       |  
|Home equity                                                                                    |  |                                         | 0       |                                |   | 0       |  
|Installment                                                                                    |  |                                         | 120     |                                |   | 163     |  
|Total recoveries                                                                               |  |                                         | 160     |                                |   | 205     |  
|Net loans charged-off                                                                          |  |                                         | 6,822   |                                |   | 4,051   |  
|Provision for loan losses                                                                      |  |                                         | 13,300  |                                |   | 11,062  |  
|Allowance for possible loan
 losses at end of period                                           |  | $                                       | 18,553  |                                | $ | 12,075  |  
|                                                                                               |  |                                         |         |                                |   |         |  
|Net loans charged-off to
 average loans (annualized)                                           |  |                                         | 1.21    | %                              |   | 0.54    | %
|Allowance for possible loan
 losses to total to non-performing loans                           |  |                                         | 22.44   | %                              |   | 20.60   | %
|Allowance for possible loan
 losses to total loans at end of period (net of unearned interest) |  |                                         | 2.55    | %                              |   | 1.51    | %

The
allowance for loan losses increased to 2.55% of total loans at September 30,
2010 compared to 1.51% at December 31, 2009. This increase was determined by
management to be appropriate due to the increases in classified assets,
specific reserves for impaired loans, nonperforming loans and the on-going
general economic slowdown. The Corporations management analyzes the allowance
for loan losses monthly and believes the current level of allowance is adequate
to meet probable losses as of September 30, 2010.

30

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CAPITAL RESOURCES

Federal
regulations require all financial institutions to evaluate capital adequacy by
the risk-based capital method, which makes capital requirements more sensitive
to the differences in the level of risk assets. At September 30, 2010, total
risk-based capital of the Corporation was 12.31%, compared to 11.50% at
December 31, 2009. The Tier 1 capital ratio increased from 7.26% at December
31, 2009, to 8.01% at September 30, 2010. Total stockholders equity to total
assets at September 30, 2010 increased to 6.88% from 5.92% at December 31,
2009.

LIQUIDITY

Liquidity
is measured by a financial institutions ability to raise funds through
deposits, borrowed funds, capital, or the sale of assets. Additional sources of
liquidity include cash flow from the repayment of loans and the maturity of
investment securities. Major uses of cash include the origination of loans and
purchase of investment securities. Cash flows used in financing activities,
offset by those provided by investing and operating activities, resulted in a
net decrease in cash and cash equivalents of $9.8 million from December 31,
2009 to September 30, 2010. This decrease was primarily the result of net
decreases in deposits and borrowings, offset by proceeds received from the sale
of investment securities and a decrease in loans. For more detailed
information, see the Corporations Consolidated Statements of Cash Flows.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
RISK

The
Corporation generates agribusiness, commercial, mortgage and consumer loans to
customers located primarily in North Central Illinois. The Corporations loans
are generally secured by specific items of collateral including real property,
consumer assets and business assets. Although the Corporation has a diversified
loan portfolio, a substantial portion of its debtors ability to honor their
contracts is dependent upon economic conditions in the agricultural industry.

In the
normal course of business to meet the financing needs of its customers, the
subsidiary bank is party to financial instruments with off-balance sheet risk.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract amounts of those instruments reflect
the extent of involvement the subsidiary bank has in particular classes of
financial instruments.

The
subsidiary banks exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. The subsidiary bank uses the same credit policies in
making commitments and conditional obligations as they do for on-balance-sheet
instruments. At September 30, 2010, commitments to extend credit and standby
letters of credit were approximately $91.9 million and $3.7 million
respectively.

Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The subsidiary bank evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, by the subsidiary bank upon extension of credit is based on
managements credit evaluation of the counterparty. Collateral held varies, but
may include real estate, accounts receivable, inventory, property, plant and
equipment, and income-producing properties.

Standby
letters of credit are conditional commitments issued by the subsidiary bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loan facilities to customers. The subsidiary bank secures
the standby letters of credit with the same collateral used to secure the loan.
The maximum amount of credit that would be extended under standby letters of
credit is equal to the off-balance sheet contract amount. The standby letters
of credit have terms that expire in one year or less.

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LAND HELD FOR SALE

The Corporation owns separate lots in Elburn, Aurora and Somonauk,
Illinois that have been removed from the land balance and are now shown on the
Corporations balance sheet as land held-for-sale, at the lower of cost or
market. The land in Elburn, approximately 2 acres, was purchased in 2003 for
$930,000 in anticipation of the construction of a branch facility. An updated appraisal was received in September, 2010
indicating the fair value to be $820,000. A write-down of $110,000 was recorded
to non-interest expense. The land in Aurora, consisting of two lots remaining
from the original purchase of fourteen acres in 2004 which was used to
construct a branch facility has a cost basis of $1,344,000. An updated
appraisal was also received on these two lots indicating a fair market value
above the carrying cost. The land in Somonauk, acquired in 2005 during the
acquisition of FSB Bancorp, Inc., consists of approximately two acres with a
cost basis of $80,000, well below the fair market value.

LEGAL PROCEEDINGS

There are
various claims pending against the Corporations subsidiary bank, arising in
the normal course of business. Management believes, based upon consultation
with legal counsel, that liabilities arising from these proceedings, if any,
will not be material to the Corporations financial position or results of
operation.

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

Smaller
reporting companies are not required to provide the information required by
this item.

EFFECTS OF INFLATION

The
consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America and practices within the
banking industry which require the measurement of financial condition and
operating results in terms of historical dollars, without considering the
changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have
a more significant impact on a financial institutions performance than the
effects of general levels of inflation.

32

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PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY

The following table sets
forth (in thousands) details of average balances, interest income and expense,
and resulting annualized yields/costs for the Corporation for the periods
indicated, reported on a fully taxable equivalent basis, using a tax rate of
34%.

|                                                          |  |                                       |           |                                       |   |               |  |                   |      |          |   |               |  |   |        |  |  |      |  
|--------------------------------------------------------- |  | ------------------------------------- | --------- | ------------------------------------- | - | ------------- |  | ----------------- | ---- | -------- | - | ------------- |  | - | ------ |  |  | ---- | -
|                                                          |  |                                       |           |                                       |  
|                                                          |  | Nine Months Ended, September 30, 2010 |           | Nine Months Ended, September 30, 2009 |  
|                                                          |  | Average
 Balance                      |           | Interest                              |   | Yield/ 
 Cost |  | Average 
 Balance |      | Interest |   | Yield/ 
 Cost | 
|Average Interest-Earning Assets                           |  |                                       |           |                                       |   |               |  |                   |      |          |   |               |  |   |        |  |  |      |  
|                                                          |  |                                       |           |                                       |   |               |  |                   |      |          |   |               |  |   |        |  |  |      |  
|Interest-bearing deposits                                 |  | $                                     | 55,740    |                                       | $ | 104           |  |                   | 0.25 | %        | $ | 45,982        |  | $ | 76     |  |  | 0.22 | %
|Taxable investment securities                             |  |                                       | 126,124   |                                       |   | 3,689         |  |                   | 3.91 | %        |   | 173,583       |  |   | 5,732  |  |  | 4.41 | %
|Tax-exempt investment securities                          |  |                                       | 125,812   |                                       |   | 6,097         |  |                   | 6.48 | %        |   | 120,498       |  |   | 5,852  |  |  | 6.49 | %
|Federal funds sold                                        |  |                                       | 132       |                                       |   | 0             |  |                   | 0.00 | %        |   | 176           |  |   | 0      |  |  | 0.00 | %
|Net loans (1)                                             |  |                                       | 699,391   |                                       |   | 30,171        |  |                   | 5.77 | %        |   | 745,030       |  |   | 33,602 |  |  | 6.03 | %
|                                                          |  |                                       |           |                                       |   |               |  |                   |      |          |   |               |  |   |        |  |  |      |  
|Total interest-earning assets                             |  |                                       | 1,007,199 |                                       |   | 40,061        |  |                   | 5.32 | %        |   | 1,085,269     |  |   | 45,262 |  |  | 5.58 | %
|                                                          |  |                                       |           |                                       |   |               |  |                   |      |          |   |               |  |   |        |  |  |      |  
|Average non-interest earning assets (2)                   |  |                                       | 161,664   |                                       |   |               |  |                   |      |          |   | 151,002       |  |   |        |  |  |      |  
|                                                          |  |                                       |           |                                       |   |               |  |                   |      |          |   |               |  |   |        |  |  |      |  
|Total average assets                                      |  | $                                     | 1,168,863 |                                       |   |               |  |                   |      |          | $ | 1,236,271     |  |   |        |  |  |      |  
|                                                          |  |                                       |           |                                       |   |               |  |                   |      |          |   |               |  |   |        |  |  |      |  
|Average Interest-Bearing Liabilities                      |  |                                       |           |                                       |   |               |  |                   |      |          |   |               |  |   |        |  |  |      |  
|                                                          |  |                                       |           |                                       |   |               |  |                   |      |          |   |               |  |   |        |  |  |      |  
|Interest-bearing demand deposits                          |  | $                                     | 374,249   |                                       |   | 2,332         |  |                   | 0.83 | %        | $ | 279,587       |  |   | 2,590  |  |  | 1.24 | %
|Savings deposits                                          |  |                                       | 72,979    |                                       |   | 46            |  |                   | 0.08 | %        |   | 65,638        |  |   | 38     |  |  | 0.08 | %
|Time deposits                                             |  |                                       | 426,437   |                                       |   | 5,970         |  |                   | 1.87 | %        |   | 578,414       |  |   | 12,451 |  |  | 2.88 | %
|Interest-bearing demand notes issued to the U.S. Treasury |  |                                       | 989       |                                       |   | 0             |  |                   | 0.00 | %        |   | 942           |  |   | 0      |  |  | 0.00 | %
|Federal funds purchased                                   |  |                                       | 0         |                                       |   | 0             |  |                   | 0.00 | %        |   | 339           |  |   | 1      |  |  | 0.39 | %
|Customer repurchase agreements                            |  |                                       | 37,499    |                                       |   | 217           |  |                   | 0.77 | %        |   | 35,299        |  |   | 294    |  |  | 1.11 | %
|Advances from Federal Home Loan Bank                      |  |                                       | 23,670    |                                       |   | 373           |  |                   | 2.11 | %        |   | 32,495        |  |   | 722    |  |  | 2.97 | %
|Trust preferred securities                                |  |                                       | 25,000    |                                       |   | 1,025         |  |                   | 5.48 | %        |   | 25,000        |  |   | 1,065  |  |  | 5.70 | %
|Note payable                                              |  |                                       | 0         |                                       |   | 0             |  |                   | 0.00 | %        |   | 3,175         |  |   | 96     |  |  | 4.04 | %
|                                                          |  |                                       |           |                                       |   |               |  |                   |      |          |   |               |  |   |        |  |  |      |  
|Total interest-bearing liabilities                        |  |                                       | 960,823   |                                       |   | 9,963         |  |                   | 1.39 | %        |   | 1,020,889     |  |   | 17,257 |  |  | 2.26 | %
|                                                          |  |                                       |           |                                       |   |               |  |                   |      |          |   |               |  |   |        |  |  |      |  
|Net yield on average interest-earning assets              |  |                                       |           |                                       | $ | 30,098        |  |                   | 4.00 | %        |   |               |  | $ | 28,005 |  |  | 3.45 | %
|                                                          |  |                                       |           |                                       |   |               |  |                   |      |          |   |               |  |   |        |  |  |      |  
|Average non-interest-bearing liabilities                  |  |                                       | 130,824   |                                       |   |               |  |                   |      |          |   | 117,249       |  |   |        |  |  |      |  
|                                                          |  |                                       |           |                                       |   |               |  |                   |      |          |   |               |  |   |        |  |  |      |  
|Average stockholders equity                              |  |                                       | 77,216    |                                       |   |               |  |                   |      |          |   | 98,133        |  |   |        |  |  |      |  
|                                                          |  |                                       |           |                                       |   |               |  |                   |      |          |   |               |  |   |        |  |  |      |  
|Total average liabilities and stockholders equity        |  | $                                     | 1,168,863 |                                       |   |               |  |                   |      |          | $ | 1,236,271     |  |   |        |  |  |      |  

|                                               | 
|---------------------------------------------- | 
|                                               | 
|(1) Excludes nonaccrual loans and overdrafts. 
|(2) Includes nonaccrual
 loans and overdrafts.

The
following table reconciles tax-equivalent net interest income (as shown above)
to net interest income as reported on the Consolidated Statements of Income.

|                                      |  |                                          |        |      |   |        | 
|------------------------------------- |  | ---------------------------------------- | ------ | ---- | - | ------ | 
|                                      |  | For the Nine Months Ended
 September 30, |       
|                                      |  | 2010                                     |        | 2009 |  
|Net interest income as
 stated        |  | $                                        | 27,913 |      | $ | 25,907 | 
|Tax equivalent adjustment-investments |  |                                          | 2,073  |      |   | 1,990  | 
|Tax equivalent adjustment-loans       |  |                                          | 112    |      |   | 108    | 
|                                      |  |                                          |        |      |   |        | 
|Tax equivalent net interest
 income   |  | $                                        | 30,098 |      | $ | 28,005 | 

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Schedule 7

Controls and Procedures

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Disclosure controls and procedures. We
 evaluated the effectiveness of the design and operation of our disclosure
 controls and procedures as of September 30, 2010. Our disclosure controls and
 procedures are the controls and other procedures that we designed to ensure
 that we record, process, summarize and report in a timely manner the
 information we must disclose in reports that we file with or submit to the
 SEC. The President and Chief Executive Officer, and Executive Vice-President
 and Chief Financial Officer, reviewed and participated in this evaluation. Based
 on this evaluation, they concluded that, as of the date of their evaluation,
 our disclosure controls were effective.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(b) | Internal controls. There have not been
 any changes in our internal controls over financial reporting during the
 quarter ended September 30, 2010 that materially affected or is reasonably
 likely to materially affect those controls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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